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Chapter 5

ECO100Y1 Chapter 5 Notes

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Robert Gazzale

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ECO100Y1 Textbook Notes Chapter 5 5.1 The Interaction Among Markets  No market or industry exists in isolation from the economy’s many other markets.  A change in one market will lead to changes in other markets which will, in turn, lead to changes in the first market. (called feedback)  Partial-equilibrium analysis: the analysis of a single market in isolation, ignoring any feedbacks that may come from induced changes in other markets.  If a specific market is quite small relative to the entire economy, changes in the market will have relatively small effects on other markets. The feedback effects on the original market will, in turn, be even smaller. In such cases, partial-equilibrium analysis can successfully be used to analyze the original market.  General-equilibrium analysis: the analysis of all the economy’s markets simultaneously, recognizing the interactions among the various markets. 5.2 Government-Controlled Prices  Price controls: government policies that attempt to hold the price of a product at some disequilibrium value. (some higher others lower)  At any disequilibrium price, quantity exchanged is determined by the lesser of quantity demanded or quantity supplied.  Price floor: the minimum permissible price that can be charged for a particular good or service.  If a price floor is set above the equilibrium price than it is called a binding price floor.  Binding price floors lead to excess supply. Either an unsold surplus will exist, or someone (usually the government) must enter the market and buy the excess supply.  Minimum wage (price floor) causes unemployment.  Price ceiling: the maximum price at which certain goods and services may be exchanged.  If a price ceiling is set below the free-market equilibrium price, the price ceiling lowers the price and is said to be binding.  Binding ceilings lead to excess demand, with the quantity exchanged being less than in the free-market equilibrium.  Sellers’ preferences: allocation of commodities in excess demand by decisions of the sellers.  Rationing a product involves the government distributing coupons, which are then required – with money – to purchase a product.  Black market: a situation in which goods are sold illegally at prices that violate a legal price control.  Binding price ceilings always create potential for a black market because a profit can be made by buying at the controlled price and selling at the black market price.  To the extent t
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