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Lecture 6

ECN 104 Lecture Notes - Lecture 6: Price Ceiling, Price Floor, Price Controls


Department
Economics
Course Code
ECN 104
Professor
Tsogbadral Galaabaatar
Lecture
6

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Lecture Notes from Chapter 6: Supply, Demand & Government Policies
Government Policies that Alter the Private Market Outcome
Price Controls
Price Ceiling: A legal max on the price of a good or service (rent control
Price Floor: a legal minimum on the price of a good/service (minimum wage)
Taxes
the government can make buyers or sellers pay a specific amount on each unit
bought/sold
we use the supply.demand model to see how each policy affects the market outcome
(price buyers buy, sellers sell, etc.)
How Price Ceilings Affect Market Outcomes
A price ceiling above the equilibrium price is not binding has no effect on the market outcome
A price ceiling below the equilibrium price is a binding constraint causes a shortage
In the long run, supply and demand are more price-elastic
Shortage and Rationing
with a shortage sellers must ration the goods among buyers
some rationing mechanisms - 1: long lines 2: discimination according to sellers’ buyers
these mechanisms are often unfair, and inefficient; the goods do not necessarily go to
the buyers who value them the most
in contrast, when prices are not controlled, the rationing mechanism is efficient (goods
go to buyers that value them most highly) & impersonal (thus fair)
How Price Floors Affect Market Outcomes
a price floor below the equilibrium price is not binding - has no effect on the market
outcome
a price floor above the equilibrium price is a binding constraint - causes a shortage
(possible illegal outcome)
Minimum wage laws do not affect highly skilled workers, but obviously affects teen workers (part
time jobs)
Studies: A 10% increase in the min wage raises teen unemployment by 1-3%
Evaluating Price Controls
Recall Chapter 1: “Markets are usually a good way to organize economic activity”
Prices are the signals that guide the allocation of society’s resources. This allocation is
altered when policymakers restrict prices.
Price controls often intended to help the poor but is more harmful then helpful
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