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ECON 101 NOTES: Government Policy

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Alexander Gainer

SUPPLY AND DEMAND GOVERNMENT POLICY In this chapter we analyze how much government impacts the private market. There are two types of price control: a price ceiling and a price floor. - Note that when a price ceiling or price floor is introduced there is no new point of equilibrium - Price ceiling – max for a good or service Demand - Above equilibrium is NOT binding - Below equilibrium is binding P Supply - A price ceiling that is binding is illegal and it causes shortages - In the long run supply and demand are more price-elastic (sensitive to price), so shortage is Price ceiling larger Ex. If the government introduces a bill that says the price of apartments have to be low Shortage (under equilibrium) then more people will try to buy apartments. Then apartment owners will try to sell or close of apartments because it is too costly to maintain, therefore there will be Q less apartments supplied and usually the conditions of the apartments will be horrible. - Shortage – When the quantity demanded exceeds the quantity supplied - Need to figure out how to ration goods among buyers - Rationing mechanisms often have long lines or discrimination according to biases - Often unfair and inefficient - Inefficient – doesn’t go to the buyer that most desires the good or service - Efficient – when price is not controlled the good will go to the customer that values the item most highly and it will be fair Supply - Price floor – min for a good or service P Surplus - Usually affects unskilled labor Ex. Minimum wage - When the price floor is under equilibrium then the price floor is NOT binding - When the price floor is above equilibrium then the price floor is binding - A binding price floor will cause a surplus Demand - Surplus – when the quantity supplied exceeds the quantity demanded - Tax – government can make buyers and sellers pay for a specific amount on every unit people buy/sell Q By analyzing the supply and demand model to see how much each policy impacts the market outcomes Assessing Price Controls - Government intervention can al
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