Class Notes (839,626)
Canada (511,431)
Economics (1,511)
EC120 (577)

Chapter 6 Price Control

2 Pages

Course Code

This preview shows 80% of the first page. Sign up to view the full 2 pages of the document.
Keith Diaz Chapter 6: Supply, Demand, and Government Policies Price controls Price ceiling  legal maximum on the price of a good or service (rent control)  Above the equilibrium price means not binding: has no effect on the market outcome - Market forces naturally move the economy to the equilibrium  It is below the equilibrium so that it’s a binding constraint on the price, causing shortage - Forces of supply and demand tend to move the rice toward the equilibrium price, but when the market price hits the ceiling, it can rise no further  Usually to protect consumers, in markets where the product in question is a necessity or a merit good (good that would be underprovided if the market were allowed to operate freely)  In LR, shortage is larger due to more elasticity of supply &demand  sellers must ration the goods among buyers (ex: long lines, discrimination according to biases)  unfair and inefficient as goods don’t always go to the buyers who value them  lottery, first come first served, discrimination  But when prices are not controlled, the rationing mechanism is efficient and impersonal  goods go to buyers that value them most due to competition Evaluation  Rent control may keep rents low, but it can reduce the quantity and quality of affordable housing people respond to incentives so landlords want to keep their buildings clean and attractive, but when there’s a price ceiling and a shortage, landlords lose their incentive to respond to concerns  Rent subsidies don’t reduce the quantity sullied, and don’t lead to shortages  causes excess demand (shortage), as people buy more and producers supply less at such low prices  first come first serve  normally, prices would then increase, but this is illegal (leads to black market)  the government must reduce the excess demand. 1. Shift the demand curve left, to reach equilibrium at the maximum price. But this would limit the consumption of the product, which goes against the point of imposing the price ceiling. 2. Shift supply curve to the right, until equilibrium is reached at the maximum price. A. Subsidize the firms to encourage production B. Start to produce the product themselves (government), thus increasing supply C. Release stocks (stored goods) if they exist Price floor  To raise incomes for producers, & protect workers by setting a minimum wage more workers  legal minimum on the price of a good or service (minimum wages) - workers determine the supply of labor, while firms determine the demand of labor (with wages)  below the equilibrium price is not binding: has no effect on the market outcome - workers with well-paying jobs are not affected no matter what the price floor is  above the equilibrium is a binding constraint on the wage, and causes a surplus (unemployment) - improve the economy by increasing income levels among the most vulnerable Evaluation  not all labour markets are competitive  higher wages lead to less turnover, and thus lower costs  improve economy by increasing income levels among most vulnerable  Firms are likely to become inefficient as they get to produce goods and charge high prices Keith Diaz  Minimum wage laws do not affect highly skilled workers, but affect teen workers because they are the among the least skilled and
More Less
Unlock Document

Only 80% of the first page are available for preview. Some parts have been intentionally blurred.

Unlock Document
You're Reading a Preview

Unlock to view full version

Unlock Document

Log In


Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.