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ECN 104 (387)
Chapter 6

ECN104 - CHAPTER 6 Review

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ECN 104
Helene Moore

ECN104­CHAPTER 6  GOVERNMENT POLICIES THAT ALTER THE PRIVATE MARKET OUTCOME Price Controls  Price Ceiling: a legal max on the price of a good or a service o Example: rent control  Price Floor: a legal min on the price of a good or service o Example: minimum wage Taxes  The govt can make buyers or sellers pay a specific amount on each unit bought/sold  It is a wedge between supply and demand  Also, supply and demand cannot be equal Example #1: The Market For Apartments HOW PRICE CEILING AFFECT MARKET OUTCOMES  A price ceiling above the eq’m price is not binding – has no effect on the market outcome.  Ceiling have to be below eq’m to be binding  The eq’m price ($800) is above the ceiling and therefore illegal.  The ceiling is a binding constraint on the price, causes a shortage.  $500 is the most you can charge for rent  We have an excess demand  People are willing to pay $800 but there are no rentals available because of the shortage  In the long run, supply and demand are more price-elastic.  So, the shortage is larger.  Rent control in capital economy causes homelessness  In the long run, supply and demand becomes elastic Example #2: Market For Unskilled Workers  Upward sloping – want to work more  Downward sloping – want to work less HOW PRICE FLOORS AFFECT MARKET OUTCOME  A price floor below the eq’m price is not binding – has no effect on the market outcome.  Some students may wonder why the $3 price floor does not cause a shortage.  After all, at a wage of $3, the quantity of unskilled workers that firms wish to hire exceeds the quantity of unskilled workers that are looking for jobs.  The eq’m wage ($4) is below the floor and therefore illegal.  The floor is a binding constraint on the wage, causes a surplus (i.e., unemployment).  Qd is less than Qs  There is a surplus of labor THE MINIMUM WAGE  Min wage laws do not affect highly skilled workers.  They do affect teen workers.  Studies: A 10% increase in the min wage raises teen unemployment by 1-3%.  When you raise the minimum wage, there is unemployment  This effects teen workers because jobs are gone or they don’t exist TAXES  The govt levies taxes on many goods & services to raise revenue to pay for national defense, publi
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