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Lecture 6

Economics 1021A/B Lecture Notes - Lecture 6: Equilibrium Point, Economic Equilibrium, Price Ceiling


Department
Economics
Course Code
ECON 1021A/B
Professor
Michael Parkin
Lecture
6

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CHAPTER 6 GOVERNMENT ACTIONS IN
MARKETS
PRICE CAPS OR PRICE CEILINGS
The idea that when rent is too high, the government may step in to limit the price of rent
oThis is not necessarily a good thing
Price ceiling or price cap is when the government sets a certain price that rent cannot
exceed without making it illegal
Setting the price cap above the equilibrium price has no effect because they are already
willing to pay less than the government issues
BUT setting the price cap below the equilibrium price does because it would mean that
normally people are willing to pay more for a certain quantity but the government does not
allow that
A HOUSING SHORTAG E
Due to the effects of a price ceiling being set below the equilibrium point
At the price set by the government, the quantity demanded exceeds the quantity supplied
oCauses a shortage
Rent above the rent ceiling of $800 is illegal
At the rent of $800 per month, the quantity
of housing supplied is 60 thousand units
while the amount demanded is 80 thousand
units
oShortage is created
Some people will become frustrated and are
willing to pay $1200 for the 60 thousandth
unit
oCreating a black market
IN CR EA SE D SEARC H ACTIVITY
Search activity is the time spent looking for someone wo do business with (the time spent
searching around)
When price is regulated, a shortage occurs and the search activity increases
Despite the fact that the price for the rent paid by consumers being lowered, the opportunity
cost when the search activity is factored in is equal to both the price of the house and the time
spent searching
oTherefore, the opportunity cost is equal to the price + search activity
Often this rent ceiling makes the opportunity cost higher than it would have been without the
rent ceiling
A BLACK MARK ET
Due to the existence of a shortage caused by price ceilings, buyers are willing to pay more for
a good or service than its regulated price
oPrice ceiling sets a price that both buyers and sellers have to abide by, this price will
cause the quantity demanded to exceed the quantity supplied
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oHowever, buyers cannot buy the amount that is not supplied
Therefore, people will fight for the limited goods by paying higher prices
than other buyers
People are willing to spend more money on the available quantity as the demand price
exceeds the supply price
oNot only does quantity demanded > quantity supplied
oBut demand price > supply price
oThis causes an illegal market called the black market as sellers know that a buyer
will want to pay more for that quantity supplied and some sellers are going to want to
sell it for more knowing that buyers are willing to pay more
IN EF FICIENCY OF A RENT CEI LI NG
Recall: consumer surplus is the excess of the benefit received from a good over the amount
paid for it
Producer surplus is the excess of the amount received from the sale of a good or service
over the cost of producing it
The underproduction creates a deadweight loss
Search activity (cost of searching resources) also takes up producer and consumer surplus
shrinking it even more
ARE RENT CEILIN GS FAIR?
Unfair according to fair rules as it blocks voluntary exchange
According to the fair results view, the intent is fair but the outcome is not necessarily fair
because it does not necessarily mean that the outcome will benefit the less well off
A LABOUR MA RKET WITH A MINIMUM WAGE
Price floor is a government regulation that makes it illegal to charge a price lower than a
specified level
Price floor must be above the equilibrium point in order to have an effect
Minimum wage is the price floor in the labour market that sets the wage that workers must
be at least paid
MI NIMUM WAGE B RINGS UNEM PLOYMENT
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Minimum wage creates a shortage in jobs available and a surplus in the labour supplied
Since minimum wage is above the equilibrium point, quantity of labour supplied exceed the
quantity of labour demanded
oThis leads to some people without jobs (unemployment)
At the price demanded (that is regulated), a frustrated unemployed worker will want the job at
a lower pay (supply price) than the regulated amount though this is technically illegal
IS M INIMUM WAGE FAIR?
Unfair both in terms of fair results and fair rules
The result is unfair because minimum wage only benefits those who can find jobs, because of
the surplus in supply and shortage in demand, minimum wage causes people to not find jobs
which leaves them worse off than before
The rules are unfair because it prevents the voluntary exchange between the two parties
oFirms are willing to hire more labour and people are willing to be paid less but
regulations do not allow it
IN EF FICIENCY OF A MINIMUM WAGE
Same idea as the inefficiency of minimum wage loss
oDeadweight loss plus the potential loss from job searched (search activity)
Remember: the firm is the consumer, while the workers are the buyers
TAXES
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