2. Economics 2010 Lecture 10 Markets in Action

3. Two examples:  Housing markets and rent ceilings  Labor markets and minimum wages

4. Housing Markets and Rent Ceilings  How does an unregulated housing market work?  To answer this question, let's see how such a market copes with a massive supply shock

5. Housing Markets and Rent Ceilings  San Francisco, 1906: a massive earthquake destroyed more than half the housing. Virtually no one died.  How did San Francisco cope with such a devastating reduction in the supply of housing?

6. Housing Markets and Rent Ceilings

7.  Short-run adjustment: a rise in price and a decrease in the quantity demanded Housing Markets and Rent Ceilings

8.  Long-run adjustment: an increase in supply  Price falls  Quantity demanded increases Housing Markets and Rent Ceilings

9.  Rent ceilings  Search activity (we had so far ignored this in ECON 2010)  “Black” markets Housing Markets and Rent Ceilings

10.  Rent ceiling is $16 a unit  Shortage  Search activity  Black market Housing Markets and Rent Ceilings

11.  for the 44th unit: Opportunity cost = $16, but MWTP =$24 (quite a waste!)  For demanders, the opportunity cost of a house includes the search time and effort spent looking for a house.  For the 44th house, this cost could add significantly to the $16 of the rent Housing Markets and Rent Ceilings

12.  Rent ceilings are supposed to allow poor people to access the market  but they many times keep rich established people at low rents while poor newcomers simply cannot find a house  shortages are not solved by the price mechanism but by some less efficient one. Race, sex, your connections, etc. will help more than your money

13.  Next: minimum wages

14.  A minimum wage often used  What is a minimum wage?  How does a minimum wage affect the labor market? Labor markets and minimum wages

15.  Wage is fixed above equilibrium wage  Quantity demanded decreases Labor markets and minimum wages

16.  Quantity supplied increases  Unemployment arises  No mechanism for ending unemployment Labor markets and minimum wages

17. WWhy do we have minimum wages?

18. NEXT  Markets and Efficiency  Read Ch. 5