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AGEC 242 (10)
Chapter 5

Chapter 5.docx

3 Pages

Agricultural Economics
Course Code
AGEC 242
Brahm Canzer

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Chapter 5 - Market Interactions - No market or industry exists in isolation from all the other markets in the economy - Feedback: change in one market leading to change in many other markets o Reduction in natural-gas price. So when oil and propane prices fall, feedback effect n natural- gas market shifts to left (bc=/c substitutes) o Difficult to predict feedback effect  sometimes change is small enough to ignore - Partial-equilibrium analysis: analysis of single market with all feedback effects ignored  what we’ve been using so far o Used when feedback effect is very small - General-equilibrium analysis: study of how markets function together Government-controlled Prices - Attempt to hold price at disequilibrium value - Quantity exchanged is whichever is lower (supply or demand) - Price Floors: when set above equilibrium, = binding o Binding price floors = excess supply  unless someone enters market to buy o Labour: minimum wage, excess supply = unemployment o Reason is to help suppliers earn more - Price Ceilings: lead to excess demand o Consumers must stand in line b/c first-come, first-served basis. o Soviet Union and Eastern Europe where there are price controls o Sellers Preferences: when sellers decide to whom they will sell to o If government doesn’t like this, then can issue Rations, where it is necessary to be in possession of money and ticket in order to buy - Black Markets: often arises due to price ceilings; goods sold illegally at prices that violate legal price control o Binding Price ceilings always create potential for black market bc profit can be made by buying at controlled price and celling at black-market price o In reality, unlikely that ALL of product will be subject to black market o Since there are law-abiding citizens, but some of it will be - Goals that government have when imposing price ceiling o To restrict production  maybe bc want to release resource for other use o To keep specific prices down o To satisfy notions of equity in consumption where product is in short supply - But if accompanied by significant black market, unsure if any of goals achieved o If seller price is higher, then nothing restricts them to level output o More incentive to produce more because can earn more from it o If quantity supplied is still low, then prices will be even higher than free-market equilibrium o Also products sold only to people who can afford = no equity in consumption - Example: Canadian Health Care System o Price controlled at $0, services are rationed by customers having to wait in line o No black markets, but some Canadians travel to states to get faster care Rent controls: Case Study - Has existed in London, Paris, New York - The regulations vary vastly from city to city, and newer legistlations = second generation, focusing on regulating rent, not just controlling price - Predicted Effects of Rent Control o Housing shortage b/c demand > supplied o Shortage leads to alternative allocation schemes  Landlords may have sellers’ preferences o Black markets will appear  landlords require tenants to pay “key money” = difference between free-market and controlled rents - Highly durable good that provides services for long time apartments can be used for decades o Effects typically different from long-term effects - Short-term effects limited  quantity of apartments don’t change much = inelastic - Long-term: if expected rate of return from building new ap
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