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Economics Chapter 6.pdf

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Ryerson University
ECN 104
Tsogbadral Galaabaatar

Economics Chapter 6 Supply, Demand, and Government Policies Price Ceiling: A legal maximum on the price at which a good or service can be sold Ex. Rent control Price Floor: A legal minimum on the price at which a good or service can be sold Ex. Minimum wage Taxes The govt. can make buyers or sellers pay a specific amount on each unit bought/sold. We will use the supply/demand model to see how each policy affects the market outcome (the price buyers pay, the price sellers receive, and eq’m quantity). Example 1: The Market for Apartments How price ceilings affect market outcomes Shortages and Rationing With a shortage, sellers must ration the goods among buyers. Some rationing mechanisms: (1) Long lines (2) Discrimination according to sellers’ biases These mechanisms are often unfair, and inefficient: the goods do not necessarily go to the buyers who value them most highly. In contrast, when prices are not controlled, the rationing mechanism is efficient (the goods go to the buyers that value them most highly) and impersonal (and thus fair). Example 2: The market for unskilled labor How price floors affect market outcomes The Minimum Wage Exercise 1 Determine effects of: A) A. $90 price ceiling B. $90 price floor C.$120 price floor B) C) Evaluating price controls Recall one of the Ten Principles from Chapter 1: Markets are usually a good way to organize economic activity. Prices are the signals that guide the allocation of society’s resources. This allocation is altered when policymakers restrict prices. Price controls often intended to help the poor, but often hurt more than help. Taxes: The govt levies taxes on many goods & services to raise revenue to pay for national defense, public schools, etc. The govt can make buyers or sellers pay the tax. The tax can be a % of the good’s price, or a s
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