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Oct 22, 2013.docx

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David Gray

ECO 1104 B Oct 22 , 2013 YUJIE YI #738840 Chapter 6 Supply, Demand, and Government Policies DifferentApplications  Price ceilings - Rent control  Price floors - Minimum wage - Agricultural price supports  Incidence of an excise tax - How much revenue will it raise? - Who bears the true burden? Price Ceilings  This is a regulated price designed to protect the interests of consumers  The government dictates a maximum price for a commodity  Example – rent control laws (Figure 6.3) 1 /7 - Government decides that rents aren’t “fair” - It intervenes in the housing market to provide affordable housing  If the price ceiling lies below the equilibrium rent, a situation of excess Qd for housing emerges  Price decreases, quantity supplied decreases - Developers stop building - Landlords cease to maintain units  Price decreases, quantity demanded increases  The shortage causes upward pressure on rents, and other perverse effects - Other perverse effects: Outrageous parking and key charges  Another recent and important example  Quebec Universities are being squeezed as tuition and grants are almost frozen - Not even adjusted for inflation  Fairly high cost pressure exists, especially on salaries and maintenance of IT  This means that quantity supplied (especially on a per-student basis) is falling, at least in terms of the quality of education ECO 1104 B Oct 22 , 2013 YUJIE YI #738840  So the university tries to find other ways of raising revenue, sometimes by nickelling and diming its students - These unpopular policies may be annoying, but it is extremely rational from an economics perspective  Aprice ceiling is ineffective unless it is below the equilibrium price Price Floor  Again, the market generates a price which offends our sense of “social justice”.  This time, the price is so low that producers can’t make a decent living. - It is the consumers – on the demand side – who are exploiting the producers on the supply side  Government comes to the rescue by imposing a price floor. It is a minimum bound on prices. - Figure 6.4 - Ontario beer, certain agricultural products, minimum wage  Government legislates a “fair price” for beer which is above the equilibrium level  Creates a situation of excess quantity supplied - Price increases, quantity supplied increases 3 /7 - Price increases, quantity demanded decreases - Big surpluses emerge, placing downward pressure on prices - Situation is unsustainable unless the surplus is removed from the market  Aprice floor is ineffective unless it is above the equilibrium price  Another example of asinine economics from the mouth of a politician - “Yes, there may be a surplus of peanuts, but better to have too much than too little” (example) The surplus peanuts will be bought by government to make peanut butter, which will be offered in universities free of charge (gross peanut butter).  Why is this statement TOTALLY WRONG? Opportunity Cost!!! All of the exercise products of peanuts and peanuts butter (nobody is going to eat) could have been used in another
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