ECO101H1 Lecture 8: Lecture 8-Supply, Demand and Government Policy

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copperclam445

1 Aug 2010

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Thursday, October 8, 2009.

Supply, Demand, and Government Policy

Theme

Government intervention in competitive markets is not helpful.

The Impact of Price Ceiling

Observations

1. Price ceiling, if beneath the market clearing price, creates shortages.

2. Principle of voluntary exchange:

Q (P) = minimum [QD(P), QS(P)]

3. Non-price rationing

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Price Ceiling

Shortage

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Rent Ceiling

Economic Concerns with Rent Controls

1) Shortage

2) Incentive Effects

- discourages construction (shortage worsens in long run)

- discourages maintenance

3) Non-price rationing

- inefficient (search time, opportunity cost)

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4) Not targeted to poor (single parent or doctor as preferred tenant?)

Price Floor

Shortage

Rent Ceiling

Surplus

Price Floor

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2. Application: Minimum Wage

(1) Labour surplus (unemployment)

(2) Teenagers: Most affected

(3) Reduces opportunity for on-the-job training

Minimum Wage: Three Possibilities

(1) At less than $6

Minimum Wage = $5.00 No Impact

(2) At $6

Minimum Wage = $6.00 No Impact

(3) At more than $6

Minimum Wage = $6.00 Employment Falls, Unemployment Rises

Earned Income Tax Credit as Alternative to Increase in the Minimum Wage

1. Minimum Wage $6.00

2. Earned Tax Credit* $1.00

_____

$7.00 Effective Wage

*targeted (say) single-parents or adults

Unskilled Labour

200

Minimum = $7

Minimum = $5

Wage Rate

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ECO101H1 Full Course Notes

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Related Questions

20. A binding price ceiling creates a: (a) shortage and leads to non-price rationing. (b) surplus and leads to non-price rationing. (c) surplus and so it increases revenue for the government. (d) shortage and so quantity supplied will increase in the long-run.

20. A binding price ceiling creates a: (a) shortage and leads to non-price rationing. (b) shortage and so quantity supplied will increase in the long-run. (c) surplus and so it increases revenue for the government. (d) surplus and leads to non-price rationing.