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Chapter 6

ECON 101 Chapter Notes - Chapter 6: Price Floor, Economic Equilibrium, Price Controls


Department
Economics
Course Code
ECON 101
Professor
Ratna Shrestha
Chapter
6

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Supply, Demand & Government Policies
Price controls:
Attempt by government to maintain prices at other than equilibrium levels
Price ceiling:
Legal maximum on price at which good can be sold
Prevents price from rising
o Anything below price ceiling is allowed
Binding: if price ceiling is below equilibrium price
o Market price = price ceiling
o Causes a shortage
o Rationing mechanisms:
Competitive market: inefficient & undesirable
Free market: efficient & impersonal
Ration goods with prices
Non-binding: if price ceiling is above or at equilibrium price
o Market price = usually falls back to equilibrium
Because natural market is below ceiling
Price floor:
Legal minimum on price at which good can be sold
Prevents price from falling
o Anything below price floor is allowed
Binding: if price floor is above equilibrium price
o Causes a surplus
Non-binding: if price floor is below equilibrium price
o Market price = price floor
Evaluating price controls:
Policymakers control prices bc they view market outcomes as unfair
o Try to help the less wealthy
Price controls often hurt those policymakers are trying to help
o e.g. lower rent less maintenance
o e.g. minimum wage unemployment
Other ways of helping:
o e.g. rent subsidies don’t lead to housing shortages
o e.g. wage subsidies don’t discourage firms from hiring
Taxes:
Policy instrument used by governments to raise revenue for public projects
o e.g. roads, schools, hospitals
Measuring burden (analyzing supply & demand):
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