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Chapter 6

Microeconomics chapter 6

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ECON 200

Microeconomics Chapter 6 Controls on Prices  Price ceiling: a legal max on the price at which a good can be sold. (can’t cost more than this) rent control  Not binding: the ceiling is more than the equilibrium price and all is normal.  Binding: ceiling is less than equilibrium and there is a shortage, more demanded than supplied.  Must then ration the scarce goods among the large number of buyers • Long lines, discrimination, bias  Ex: when there is a price ceiling on a good that would move to equilibrium, excepting the higher price (inelastic) it causes shortages.  Ex: rent control: inelastic in beginning and the owners have full houses at low prices so they have no incentive to keep up the houses or build new ones with little rent. They then become elastic because they can move and want to leave the badly kept houses. Responses are regulations.  Price floor: a legal min on the price at which a good can be sold. (can’t be sold for less than this) wage  Binding: price floor that is more than equilibrium and results in a surplus.  Sellers are unable to sell all their goods.  Ex: min wage: lowest price for labor that any employer can pay. • Supply of labor is determined by the workers. Demand of labor is determined by the firms. • When min wage is above equil. There is unemployment because there is more workers supplied than demanded. • Highly skilled workers have wages high above min wage and are not affected. (not binding) Taxes  Tax incidence: how the burden of a tax is distributed among
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