CIA4U0 Analyzing Current Economic Issues Chapter 5: Applications of Demand & Supply Topic 4: Government Interventions P

Government Interventions Introduction Smiths Invisible hand Reagans Magic of the Market Empirical evidence shows that markets perform best when left completely alone No direction Results in what needs to be done with little waste or shortages Why would a government intervene?

Government Interventions Introduction There are many instances or circumstances when a government feels something needs to be done Three are: 1. The price of an item is too high (paying too much) 2. The price of an item is too low (sellers are not receiving enough) 3. Social or environmental interventions

Government Interventions Ceiling Prices A restriction that prevents the price of a product from rising above a certain level Is usually used when there is some kind of supply shock and sellers feel they need to raise their prices to very high levels Depending on the product, this can cause a great deal of hardship and ruin an entire economy, not just the market for that particular product A government will put maximum on the price

Government Interventions Ceiling Prices Since this ceiling price will be below equilibrium, a shortage will occur This can cause: Long line ups for the product A black market to develop A decrease in product quality

Government Interventions Floor Prices A restriction that prevents a price from falling below a certain level Usually occurs when we are making too much of something but need to keep that market working A government will put a minimum on the price

Government Interventions Floor Prices Since this floor price will be above equilibrium, a surplus will occur This can cause: A problem in terms of what to do with the excess (usually costs taxpayers money) Consumers pay more for the product but receive less The problem with BOTH price ceilings and floors is that less of the product gets exchangedit should always be more!

Government Interventions Subsidies This is a grant of money paid to the companies within a particular industry by the government Makes up the difference between what the buyer is willing to pay and what the seller is willing to sell for So if the seller wants to sell something at $1.00 but the buyer is only willing to pay $0.90, then the government will pay the difference The equilibrium is met (artificially), everyone is happy and the economy is producing as much as it should

Government Interventions Quotas This is a restriction placed on the amount of product that individual producers are allowed to make Administered by Marketing Boards Mainly used in agriculture, especially in Canada/Ontario Works best on products that are inelastic can sell less for more, make more revenue Done to support a weak industry

Government Interventions Specific Examples Rent Controls (price ceiling) If demand increases, owners raise the rent New buildings get built Rent lowers to a new equilibrium price Some people can't afford the new rent and get evicted/leave With rent controls, people are more able to afford the rent Owners are less willing to build new buildings or maintain the ones they have

Government Interventions Specific Examples Minimum Wage (Floor Price) Market forces should set the going rate for labour Many depend on low wage jobs to support a family Government decides that the market pay is not high enough so they set a minimum wage Companies cant afford it as easily so they stop hiring or lay people off so unemployment goes up Other people are attracted by the higher wages and come to compete for the what jobs are left, adding more to the unemployment problem

Government Interventions Seatwork Group Task Question #15, page 118 In the group at your table, complete questions a) to d) for hand in by the end of the period. You can use your notes and/or text as needed Hand in one set of answers with all of your names on the sheet.