Meddling with the Market

Transcription

1 Meddling with the Market Essential Question: How do price floors & price ceilings impact the availability of goods and services in the marketplace? 1

2 The previous lesson focused on demand and supply, we studied the demand curve and the supply curve P P Quantity Quantity and the market equilibrium: P Peq Qeq Quantity 2

3 What we will learn here.. The meaning of price controls, two kinds of government intervention in markets How price controls create problems and make a market inefficient Why economists are often deeply skeptical of attempts to intervene in markets Who benefits and who loses from market interventions, and why they are used despite their well- known problems Why Price controls? uring crisis times, emergencies or wars the government wants to protect the consumers from rapidly increasing prices. If the equilibrium wage given by supply and demand for low skilled workers is below poverty level, the government can set a minimum wage. 3

4 Price controls: Price Ceilings Price Ceilings: a maximum price buyers are required to pay for a good. It is a higher limit for the price. Price controls: Price Ceilings Equilibrium Price ceiling Price Price Price Ceiling hortage 200 Quantity of icecreams Quantity of icecreams 4

5 Price controls: Price Ceilings Because of these ceilings, we are faced with a shortage. The shortage will lead to inefficiencies: A market or an economy is inefficient if there are missed opportunities: some people could be made better off without making other people worse off. Price controls: Price Floors Price Floors: a minimum price buyers are required to pay for a good. It is a lower limit for the price. 5

6 Price controls: Price Floors Equilibrium Price ceiling Price Price urplus Price Floor Quantity of icecreams Quantity of icecreams o Why Are There Price Floors? The reasons are similar to those for the price ceilings. Price floors may benefit some. Governments don t understand the supply and demand model. 6

7 Minimum Wage is actually a price floor. It is the LOWET price an employer can use for paying wages to employees uppose we raise the minimum wage? 7

8 Price of Labor (Wage) Price of Labor (Wage) Price Floor An Example upply and emand for Labor MP Quantity (in millions) Price Floor An Example upply and emand for Labor Minimum Wage - $7.25 MP Quantity (in millions) 8

9 Price of Labor (Wage) Price Floor An Example upply and emand for Labor urplus of Labor (Unemployment) Minimum Wage - $7.25 MP Quantity (in millions) Rent control is actually a price ceiling. It is the HIGHET price an landlord can charge for rent Why do we have rent controls? 9

10 Price of Housing/Rent (in hundreds) Price of Housing/Rent (in hundreds) Price Ceiling An Example upply and emand for Rental Housing MP Quantity (in tens) Price Ceiling An Example upply and emand for Rental Housing MP Maximum Rent - $750 Quantity (in tens) 10

11 Price of Housing/Rent (in hundreds) Price Ceiling An Example upply and emand for Rental Housing MP Maximum Rent - $750 hortage of Affordable Housing Quantity (in tens) Price Floors & Ceilings etermine effects of: A. $90 price ceiling B.$120 price floor 140 P The market for hotel rooms Q 11

12 A. $90 Price Ceiling The price falls to $90. Buyers demand 120 rooms, sellers supply 90, leaving a shortage. 140 P Price ceiling The market for hotel rooms shortage = Q B. $120 price floor The price rises to $120. Buyers demand 60 rooms, sellers supply 120, causing a surplus. 140 P The market for hotel rooms surplus = 60 Price floor Q 12