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Chapter 5

Economics 101: Chapter 5

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ECON 101
Robert Gateman

Economics 101: Principles of Microeconomics Chapter 5 5.1 The Interaction Among Markets  No market or industry exists in isolation from the economy's many other markets o Feedback: A change in one market will lead to a change in one or several markets  Partial equilibrium analysis: the analysis of a single market (feedback to other markets is ignored) o Small markets, will have relatively little effect on other markets o Feedback effects on small markets will also be smaller  General equilibrium analysis: the analysis of all markets together o Must consider what is happening in each individual market o Feedback effects among individual markets are also considered 5.2 Government-Controlled Prices  Attempt to hold the price of a good at some disequilibrium value  Either hold it above or below the equilibrium price Disequilibrium Price:  In a free market Qd and Qs adjust naturally to determine quantity exchanged  At any disequilibrium price, Q exchanged is determined by the lesser of Qd or Qs Price Floors:  A minimum price that is effectively set above the equilibrium price (binding)  Illegal to sell products below the price, guaranteed minimum price, or price level  Binding price floors → leads to excess supply o Unsold surplus or the someone (usually government) buy up excess supply  Producers are better off on selling products at the price floor rather than a lower price o Minimum wage, agriculture price etc.  Losses are spread across consumers, the demand side Price Ceilings:  A maximum price that is effectively set below the equilibrium price (binding)  Lead to excess demand, Q exchanged less than the free market equilibrium  In a free market, prices adjust to take care of excess demand o A price adjusted market must have other factors that help allocate the excess demand  Sellers preference: when sellers decide to whom they will and will not sell their scarce supplies to o Opposite of this method is rationing, Soviet Union, Eastern Europe, World Wars  Black market: any market in which goods are sold illegally at prices that violate a price control o Binding price ceilings always create the potential for a black market  Government have three main goals when imposing price ceilings: a. Restrict production b. Keep specific prices down c. Satisfy notion of equity in the consumption of a product that is temporarily in short supply Economics 101: Principles of Microeconomics  More effective a price ceiling, the more impact of a black market reduces the goals of government 5.3 Rent Controls Predicted Effects on Rent Controls  Qd must exceed Qs, prices will then be held below price equilibrium (Qs will decrease)  Shortage will lead to alternative allocation, laws in place to stop from eviction  Black markets appear that require tenants to pay extra fee, may force tenants out  In the short term, little will change because these goods are durable  In the long run, conversions and new ventures can take place o The supply shrinks and housing issues worsen Who Gains and Who Loses?  Existing tenants gain from the
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