1. Principles of Economics Ohio Wesleyan University Goran Skosples Supply, Demand, and Government Policies 6. Supply, Demand, and Government Policies

2. 1  What are price ceilings and price floors? What are some examples of each?  How do price ceilings and price floors affect market outcomes? LEARNING OBJECTIVES

3. 2 Government Policies That Alter the Private Market Outcome  Price controls Price ceiling: a legal maximum on the price of a good or service. Example: _________. Price floor: a legal minimum on the price of a good or service. Example: _____________.  Taxes The govt can make buyers or sellers pay a specific amount on each unit bought/sold. We will use the supply/demand model to see how each policy affects the market outcome (the price buyers pay, the price sellers receive, and eq’m quantity).

4. 3 EXAMPLE 1: The Market for Apartments P Q

5. 4 How Price Ceilings Affect Market Outcomes A price ceiling _________ the eq’m price is ___________ – it has ________ on the market outcome. P Q D S $800 300

6. 5 How Price Ceilings Affect Market Outcomes The eq’m price ($800) is _____ the ceiling and therefore _____. The ceiling is a _________ ____________ on the price, and causes a _________. P Q D S $800

7. 6 How Price Ceilings Affect Market Outcomes In the long run, supply and demand are _______ price-elastic. So, the shortage is ________. P Q D S $800

8. 7 Shortages and Rationing  With a shortage, sellers must _______ the goods among buyers.  Some rationing mechanisms: (1) long lines (2) discrimination according to sellers’ biases  These mechanisms are often unfair, and inefficient: the goods don’t necessarily go to the buyers who value them most highly.  In contrast, when prices are not controlled, the rationing mechanism is efficient (the goods go to the buyers that value them most highly) and impersonal (and thus fair).

9. 8 EXAMPLE 2: The Market for Unskilled Labor W L

10. 9 How Price Floors Affect Market Outcomes W L D S $4 500 A price floor below the eq’m price is ___________ – it has _______ effect on the market outcome.

11. 10 How Price Floors Affect Market Outcomes W L D S $4 The eq’m wage ($4) is ______ the floor and therefore _________. The floor is a _________ _____________ on the wage, and causes a _________ (i.e., ____________).

12. 11 Min wage laws do not affect _______ skilled workers. They do affect ______ workers. Studies: A 10% increase in the min wage raises ______ unemployment by 1-3%. The Minimum Wage W L D S $4 Min. wage $5 400 550

13. 12 A C T I V E L E A R N I N G 1: Price floors & ceilings  Determine effects of: A. $90 price ceiling B.$90 price floor C.$120 price floor 12 Q P S 0 The market for hotel rooms D

14. 13 Q P S 0 The market for hotel rooms D A C T I V E L E A R N I N G 1: A. $90 price ceiling 13

15. 14 Q P S 0 The market for hotel rooms D A C T I V E L E A R N I N G 1: B. $90 price floor 14

16. 15 Q P S 0 The market for hotel rooms D A C T I V E L E A R N I N G 1: C. $120 price floor 15

17. 16 Evaluating Price Controls  Recall one of the Ten Principles: Markets are usually a good way to organize economic activity.  Prices are the signals that guide the allocation of society’s resources. This allocation is altered when policymakers restrict prices.  Price controls are often intended to help the poor, but they often hurt more than help them: The min. wage can cause ____________. Rent control can reduce __________________ _________________________.

18. 17 CONCLUSION: Government Policies and the Allocation of Resources  Each of the policies in this chapter affects the allocation of society’s resources. Example 1: a binding maximum rent causes a shortage of quality apartments, which means that apartments are rationed and buyers who value the apartments the most do not necessarily get the apartments. Example 2: a binding minimum wage causes a surplus of workers, a waste of resources.  So, it’s important for policymakers to apply such policies very carefully.

19. 18  A price ceiling is a legal maximum on the price of a good. An example is rent control. If the price ceiling is below the eq’m price, it is binding and causes a shortage.  A price floor is a legal minimum on the price of a good. An example is the minimum wage. If the price floor is above the eq’m price, it is binding and causes a surplus. The labor surplus caused by the minimum wage is unemployment. CHAPTER SUMMARY