1. FUN FACTS If you earn twenty thousand dollars a year, one minute of your time is worth a little more than seventeen cents. 100% of all lottery winners gain weight. Only humans sleep on their backs. The temperature can be determined by counting the number of chirps in fourteen seconds and adding 40.

2. UNIT IV: MICROECONOMICS LESSON 5 GOVERNMENT INTERACTION AND PRICES

3. GOVERNMENT INTERACTION In a pure market economy, prices will change according to supply and demand only There are no such things as pure market economies and sometimes the government will step in and cause changes in prices Governments will do this in order to protect producers and consumers from big price changes This is done through price ceilings and price floors

4. PRICE CEILINGS A price ceiling sets the highest price that can be charged for a good or service. The price is generally set below the equilibrium price and results in a shortage. Also known as a maximum price This is done to increase availability by allowing more people to afford the good Protects consumers

5. PRICE CEILING

6. PRICE CEILINGS Producers may not want to sell at the low price, but consumers will want to buy more, so this causes shortages When shortages occur governments may be forced to go to a system of rationing- where goods are allocated out When shortages occur black markets being to develop An illegal market in which goods and services are sold above their legal price

7. EXAMPLE S1S1 D1D1 P mkt P max Q mkt Shortage

8. EXAMPLE S1S1 D1D1 P mkt P max Q mkt QDQD QSQS P BM

9. RENT CONTROL Rent control is an example of setting a price ceiling. Some cities instituted rent controls when housing prices were rising rapidly and current city residents could no longer afford rent. Rent controls have resulted in a shortage of apartments because they require owners to accept a price that is lower than the equilibrium price. Rather than accept the low price, owners often convert the apartments to condominiums and sell them, thus decreasing the supply of available apartments.

10. PRICE FLOORS A price floor sets the lowest price at which one can buy a good or service. Price floors are generally set above the equilibrium price and result in a surplus. Also known as a minimum price This exists to protect suppliers

11. PRICE FLOOR

12. PRICE FLOORS Consumers may not want to pay the higher price so it results in a surplus The surplus cannot stay on the market so the government will sometimes step in and purchase the excess This then leads to more costs for the government

13. EXAMPLE S1S1 D1D1 P mkt Q mkt P min Surplus

14. EXAMPLE S1S1 D1D1 P mkt Q mkt P min QDQD QSQS D +gov buying

15. MINIMUM WAGE Minimum Wage is an example of setting a price floor The federal government sets a base level for the minimum wage that workers can be paid- states may make it higher If the minimum wage is set above the market equilibrium price for labor then it will result in a surplus of labor as businesses will not want to or be able to pay for more workers at the high price

16. TAXES The government will affect prices through certain taxes that they impose A specific tax is a fixed amount taxed per unit Ad valorem (percentage tax) is a percentage taxed on the overall value of a good or service

17. OTHER INTERACTIONS Subsidies: When the government provides an incentive for sellers to produce more Aimed to keep the market price low Buffer stocks: The government attempts to keep prices stable in a market where prices fluctuate often The government will take out some of the supply in large supply years to keep prices high and put it back in low supply years to keep prices low Quotas: When the government sets a specific amount that can be produced Keeps prices from becoming too low (stay higher)

18. BUFFER STOCKS S1S1 D1D1 S2S2 P mkt P buffer Q mkt Q buffer

19. BUFFER STOCKS S2S2 D1D1 S1S1 P mkt P buffer Q mkt Q buffer

20. QUOTA S D1D1 S P mkt P quota Q mkt Q quota