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Chapter 6

Microeconomics - Chapter 6.docx

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Department
Commerce
Course
COMMERCE 1B03
Professor
Rita Cossa
Semester
Spring

Description
Microeconomics – Chapter 6 (Supply, Demand, and Government Policy) Price Ceiling – A legal maximum on the price of a good/service - Ex. Maximum rent Price Floor – A legal minimum on the price of a good/service - Ex. Minimum wage How Price Controls affect the Demand and Supply graph: - A price ceiling above the equilibrium price is not binding (Doesn’t affect anything) - A price floor under the equilibrium price is not binding (Doesn’t affect anything) - When the equilibrium price is above the price ceiling, there is a binding constraint on the price - This situation causes a shortage - In the long-run, supply and demand become more price-elastic, resulting in a larger shortage - When a shortage occurs, sellers must ration goods among buyers Rationing Mechanisms: - Long lines - Discrimination according to sellers’ bias - This mechanisms are unfair and is inefficient (Goods don’t go to those who value them highly) - When prices are not controlled, goods go to those who value them most highly and trade is impersonal, thus fair - When the equilibrium price is below the price floor, there is a binding constraint on the price - This results in a surplus because there are not enough jobs to keep up w
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