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ECON 1116 (137)
Chapter 5

01.27-01.29.14 Chapter 5.docx

7 Pages
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Department
Economics
Course Code
ECON 1116
Professor
Osborne Jackson

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01/27-01/29 Chapter 5 RECAP: Market equilibrium is when market price moves to the level at which quantity supplied equals quantity demanded. Why government control prices: Price controls: legal restrictions on how low or high a market price may go. - Price ceilings: maximum price sellers are allowed to charge for a good or service. o Usually imposed during crisis. (harvest failures, natural disasters, wars…) - Price floors: minimum price buyers are required to pay for a good or service. Modeling a Price Ceiling: - Now government imposes a ceiling of limiting rents below 800 landlords less incentive to offer apartments so they won’t be as willing to supply as many as they would at equilibrium. Additionally, more people would want to rent for the price of 800. So there is a shortage of rental houses. (Displayed image below) But if it was above 1,000 then there would not be an effect. 01/27-01/29 Chapter 5 How price ceiling causes inefficiency: 1. Inefficiently Low Quantity: - Deadweight loss: is the loss in total surplus that occurs whenever an action or policy reduces the quantity transacted below the efficient market equilibrium quantity. (area above the supply curve and below the demand curve. 2. Inefficient Allocation to Consumers: - Some people who want the good badly and are willing to pay a high price don’t get it, and some who care relatively little about the good and are only willing to pay a low price do get it. 01/27-01/29 Chapter 5 o Eg. Someone who is willing to pay a lot for an apartment and someone who is not willing to pay a lot and doesn’t want it anyways. The person who isn’t willing to pay a lot can rent it to the person who wants to pay a lot and they will both be made better off. 3. Wasted Resources: - People expend money, effort, and time to cope with the shortages caused by the price ceiling. 4. Inefficiently Low Quality: - Sellers offer low-quality goods at a low price even though buyers would prefer a higher quality at a higher price. 5. Black Market: - A market in which goods or services are bought and sold illegally, either because it is illegal to sell them at all or because the price charged are legally prohibited by price ceiling. 3 common results in price ceiling: 1. Persistence shortage of the good
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