The Lever of Command: Price and Quantity Controls *and the four moments in western history

Supply, Demand, and Government Policies uIn a free, unregulated market system, market forces establish equilibrium prices and exchange quantities. uWhile equilibrium conditions may be efficient, it may be true that not everyone is satisfied.

Price Controls... u Are usually enacted when policymakers believe the market price is unfair to buyers or sellers. u Result in government-created price ceilings and floors.

Price Ceilings & Price Floors Price Ceiling uA legally established maximum price at which a good can be sold. Price Floor uA legally established minimum price at which a good can be sold.

Price Ceilings  The price ceiling is not binding if set above the equilibrium price.  The price ceiling is binding if set below the equilibrium price, leading to a shortage.

A Price Ceiling That Is Not Binding... $4 3 Quantity of Ice-Cream Cones 0 Price of Ice-Cream Cone Demand Supply Price ceiling Equilibrium price 100 Equilibrium quantity Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.

A Price Ceiling That Is Binding... $3 Quantity of Ice-Cream Cones 0 Price of Ice-Cream Cone 2 Demand Supply Equilibrium price Price ceiling Shortage 125 Quantity demanded 75 Quantity supplied Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.

Effects of Price Ceilings A binding price ceiling creates...  shortages because Q D > Q S. u Example: Gasoline shortage of the 1970s  nonprice rationing u Examples: Long lines, Discrimination by sellers, black market

Lines at the Gas Pump In 1973 OPEC raised the price of crude oil in world markets. Because crude oil is the major input used to make gasoline, the higher oil prices reduced the supply of gasoline. What was responsible for the long gas lines? Economists blame government regulations that limited the price oil companies could charge for gasoline.

The Price Ceiling on Gasoline Is Not Binding... $4 P1P1 Quantity of Gasoline 0 Price of Gasoline Q1Q1 Demand Supply Price ceiling 1. Initially, the price ceiling is not binding...

The Price Ceiling on Gasoline Is Binding... P1P1 Quantity of Gasoline 0 Price of Gasoline Q1Q1 Demand S1S1 Price ceiling S2S2 2. …but when supply falls... P2P2 3. …the price ceiling becomes binding …resulting in a shortage.

Rent Control uRent controls are ceilings placed on the rents that landlords may charge their tenants. uThe goal of rent control policy is to help the poor by making housing more affordable. uThe Swede Assar Lindbeck: “the best way to destroy a city, other than bombing.”

Rent Control in the Short Run... Quantity of Apartments 0 Rental Price of Apartment Demand Supply Controlled rent Shortage Supply and demand for apartments are relatively inelastic

Rent Control in the Long Run... Quantity of Apartments 0 Rental Price of Apartment Demand Supply Controlled rent Shortage Because the supply and demand for apartments are more elastic... …rent control causes a large shortage

Price Floors When the government imposes a price floor, two outcomes are possible. uThe price floor is not binding if set below the equilibrium price. uThe price floor is binding if set above the equilibrium price, leading to a surplus.

A Price Floor That Is Not Binding... $3 Quantity of Ice-Cream Cones 0 Price of Ice-Cream Cone 100 Equilibrium quantity Equilibrium price Demand Supply Price floor 2

A Price Floor That Is Binding... $3 Quantity of Ice-Cream Cones 0 Price of Ice-Cream Cone Equilibrium price Demand Supply Price floor$4 120 Quantity supplied 80 Quantity demanded Surplus Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.

Effects of a Price Floor uA price floor prevents supply and demand from moving toward the equilibrium price and quantity. uWhen the market price hits the floor, it can fall no further, and the market price equals the floor price.

Effects of a Price Floor A binding price floor causes...  a surplus because Q S >Q D.  nonprice rationing is an alternative mechanism for rationing the good, using discrimination criteria. uExamples: The minimum wage, Agricultural price supports

The Minimum Wage An important example of a price floor is the minimum wage. Minimum wage laws dictate the lowest price possible for labor that any employer may pay.

The Minimum Wage Quantity of Labor 0 Wage Equilibrium wage Labor demand Labor supply A Free Labor Market Equilibrium employment

Minimum wage The Minimum Wage Quantity of Labor 0 Wage Labor demand Labor supply Quantity supplied Quantity demanded Labor surplus (unemployment) A Labor Market with a Minimum Wage

Now you can do the end of Activity 9!!!