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Chapter 5

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Department
Economics
Course
ECO105Y1
Professor
Paul Cohen
Semester
Fall

Description
Chapter 5: What Gives When Prices Don’t? (Government Choices, Markets Efficacy, and Equity) -When price is fixed below market-clearing, shortages develop (quantity demanded greater than quantity supplied) and consumers are frustrated. Quantity sold = quantity supplied only. -When price is fixed above market-clearing, surpluses develop (quantity supplied greater than quantity demanded) and businesses are frustrated. Quantity sold = quantity demanded only Fixed Prices = No coordinated Prices- The only way shortages or surpluses disappear is by quantities adjusting to whichever is less. With fixed prices, either the consumer or business is frustrated. Rent Controls: Example of price ceiling, maximum price set by government, making it illegal to charge higher price. “Robin Hood Principal”: To take from the rich, and give to the poor. -Housing shortages, an unintended consequence of rent controls, give landlords the upper hand in dealings with tenants. -A contributing factor to the shortage of housing may be that landlord’s benefits no longer exceed opportunity costs. -Remaining tenants may not see the incentive of keeping the rented space in good condition, and may start collecting “key money”. -Unintended consequence of rent controls is subsidizing well-off tenants willing and able to pay market-clearing rent. -Alternative policies to help the homeless are government subsides, to help the poor pay rent, and government-supplied housing. But all polices have opportunity costs to consider. -Living Wage: 10$ per hour, enough to allow an individual in a Canadian City to live above the poverty line. -Minimum Wage Laws: example of a price floor, minimum price set by government, making it illegal to pay lover price. -When governments set minimum wages above market-clearing wage, quantity of labor supplied by households, will be greater than quantity of labor demanded businesses, creating unemployment. -Quantity of unemployment creating is increased minimum wage depends on the businesses elasticity of business demand for unskille
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