ECON 1000 Chapter 6: Mircoeconomics Parkin & Bade 10th CAN Edition

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30 Jan 2019

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Price ceiling/price cap: a regulation that makes it illegal to charge a price higher than a specified level. No effect, the ceiling does not constrain the market prices. The ceiling attempts to prevent the price from regulating the quantities demanded and supplied. Rent ceiling: when a price ceiling is applied to a housing market. A rent ceiling below the equilibrium price creates: The quantity of housing demanded exceeds the quantity supplied. Search activity : the time spent looking for someone with whom to do business with. The opportunity cost of a good is equal to its price but also the value of the search time spent finding the good. O pp cost of housing = rent + search activity. An illegal market in which the equilibrium price exceeds the rent. Deadweight loss shrinks the consumer and producer surplus. The marginal social benefit of housing exceeds the marginal social cost. Discrimination : views and self interest of the owner.

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Consider the market for rental housing in Your town. The demand and supply schedules for rental housing are given in the table.

Price ($ per month)	Quantity Demanded (thousands of units)	Quantity Supplied (thousands of units)
1100	40	80
1000	50	77
900	60	73
800	70	70
700	80	67
600	90	65
500	100	60

In a Free market for rental housing, what is the equilibrium price and quantity?
Now suppose the government in Your town decides to impose a ceiling on the monthly rental price. What is the highest level at which such a ceiling could be set in order to have any effect on the marker? Explain your answer.
Suppose the maximum rental price is set equal to $500 per month. Describe the effect on quantity demanded, supplied, and exchanged in the rental-housing market.
Suppose a black market develops in the presence of the rent controls in part (c). What is the black market price that would exist if all of the quantity supplied were sold on the black market?

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Use the elasticities in the table below to answer the following questions regarding changes in the housing rental market in a small city after rent controls are legislated.

Elasticity of Supply For Rental Housing (Short Run, 6 months)	0.02
Elasticity of Supply For Rental Housing (Medium Term, 6 Years)	0.65
Elasticity Of Demand For Rental Housing (Medium Term, 6 Years)	0.25

a.If regulatory controls (a price ceiling) reduces housing rents in a small city to 10% below the equilibrium rent level what will be the percentage change in the quantity of rental units supplied in the short run (say 6 months)?

b.What will be the percentage change in the quantity of rental units supplied in the medium term (say 6 years)?

c.What will be the percentage change in the quantity of rental units demanded in the medium term (6 years)?

d.Describe (in a few words) the type of imbalance or disequilibrium you would expect to see in the rental housing market after 6 years based upon your answers to b) and c).

1 . Effects of rent control

Rent controls force landlords to price apartments below the equilibrium price level. An immediate effect is a shortage (excess demand) of apartments, because the quantity of apartments demanded is greater than the quantity supplied at the regulated price.

When cities prevent landlords from charging market rents, which of the following are common long-run outcomes? Check all that apply.

The future supply of rental housing units increases.

The quantity of available rental housing units falls.

The quality of rental housing units falls.

Nonprice methods of rationing emerge.

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ECON 1000 Chapter 6: Mircoeconomics Parkin & Bade 10th CAN Edition

ECON 1000 Full Course Notes

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