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ECO 6 Chapter Notes Ice cream eaters and makers lobby the govt to pass laws that later the market outcome by directly controlling the price of an ice cream conebuyers of any good want a lower price and sellers of any good want a higher price interest conflict If eaters successful govt imposes legal maximumif makers successful govt imposes a legal minimum Price ceilinglegal max on the pricewhich a good can be soldPrice floorlegal minimum on the pricewhich a good can be soldIf govt imposes price ceilingequilibrium price price ceiling has no effect and market can reach equilibrium of supply and demandquantity supplied and quantity demandedsame price ceiling not binding as market forces naturally move to equilIf govt imposes price ceilingequilibrium price the market pricelower price At this price more demanded then supplied so there is a shortage price ceiling is a binding constraint on the marketforces tend to move market to equil price but when market price hits ceiling cannot go furtherGeneral resultwhen the govt imposes a binding price ceiling on a competitive market shortage of good arises and sellers must ration their scarce goods among the largeof potential buyersresults in eglong lines wh are inefficient or discrimination according to sellers bias Rationing mechanism in a free competitive market is efficient and impersonalanyone who wants to buy the good canEXAMPLESiLINESGAS PUMP IN USWhen price of crude oil rose raised cost of producing gas thus reduced supply of gasprior equil below ceiling but bc of rise supply shift shifts to left bc less supply of gas and now equil above ceiling ceiling bindingquantity demandedquantity supplied thus line upsiiRENT CONTROL IN SHORT RUNLONG RUNIn some provinces provincial govt places a ceiling that landlords may chargegoal is to help poor by making housing more affordablebut economists often criticize this stating inefficient way to help poor raise their standard of livingIn SHORT RUN landlords have fixedof apts to rentthey cannot adjust thisquickly as market conditions change Theof ppl searching for housing may not be highly responsive bc ppl take time to adjust their housing arrangementsshort run supply and demand for housing are inelasticcauses a shortage but shortage smallprimary effect in short run is to reduce rentsIn LONG RUN buyerssellers respond more to market conditions as time passes landlords respond to lower rents by not building new onesnot maintaining current ones low rents encourage ppl to find their own aptsboth supply and demand more elastic in long runlarge shortageprovinces wrent control landlords keep wait lists preferential treatment bribes bring price close to equil priceppl respond to incentivesin free markets landlords keep buildings cleansafe bcapts command higher priceslandlords lose incentive re rent cntrl
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