Textbook Notes (363,693)
Canada (158,533)
Economics (380)
ECO100Y5 (285)
Michael H O (131)
Chapter 5

ECO100Y5Y Chapter 5 Notes.docx

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Michael H O

Chapter 5 Notes - Change in one market leads to changes in other markets o No market/industry is isolated from economy’s many other markets - Induced changes in other markets, lead to changes in first market - Term is called Feedback - Partial-equilibrium analysis; analysis of single market in isolation, ignoring any feedbacks that may come from changes in other markets o Used when specific market is small relative to entire economy, resulting in small feedback - General-equilibrium analysis; analysis of all economy’s markets simultaneously, including interactions among other markets o Study of how all markets function together, account various relationships and feedback effects among each market Government-Controlled Prices - Attempt to hold price at some disequilibrium value o Some undervalue, result in shortage o Some overvalued, result in surplus - Disequilibrium Prices o If QD is less than QS, demand will determine amount exchanged o If QD is more than QS, supply will determine amount exchanged o Quantity exchanged determined by lesser of QD or QS (SHORT-SIDE RULE) - Price Floors o Minimum permissible price to be charged for good/service o If below equilibrium, no effect o If above equilibrium, it will raise the price, said to be binding o Ex. Minimum wage o Binding price floors = excess supply, either unsold surplus  Or government enters market and purchases excess supply - Price Ceilings o Maximum price for certain good/service to be exchanged o If above equilibrium, no effect o If below equilibrium, lowers the price, said to be binding o Binding price ceilings = excess demand o Goals of Government  Restrict production (release resources for other uses)  Keep specific prices down  Satisfy notions of equity in consumption of product that is temporarily short in supply - Allocating Product in Excess Demand o Free markets eliminate excess demand by allowing prices to rise o First come First serve basis o Seller’s Preference; allocation of commodities in excess demand by decision of sellers - Black Markets o Price ceilings usually result in black markets o Black Market; situation which goods are sold at prices that violate legal price control  Profit can be made buying at controlled price and selling at (illegal) black- market price Rent Controls - Effects of Binding Rent Controls o Shortage of rental housing (QD > QS) o Shortage leads to alternatives o Black markets appear - Applied to highly durable goods that pr
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