1. 11/9 Do Now 1. What does it mean if an item has inelastic demand? 2. Which way does the demand line slope with inelastic demand? 3. What does it mean if an item has elastic demand? 4. Which way does the demand line slope with elastic demand?

2. How Does Government Intervention Affect Markets?

3. Price Controls Sometimes, governments intervene in the market to influence prices. They do this by placing limits on how high or low certain prices may be. These limits are called price controls: government-imposed limits on the prices that producers may charge in the market.

4. Why Governments Intervene in Markets (You don’t have to write this slide) The temptation to impose price controls is, as the economist Henry Hazlitt reminds us, nothing new.: “The record of price controls goes as far back as human history. They were imposed by the Pharaohs of ancient Egypt. They were decreed by Hammurabi, king of Babylon, in the eighteenth century B.C. They were tried in ancient Athens.” —Henry Hazlitt

5. Why Governments Intervene in Markets In modern economies, governments usually impose price controls when they are persuaded that supply and demand will result in prices that are unfairly high for consumers or unfairly low for producers Examples: Rationing in WW2, Oil shortages in the 1970s, farm subsidies, oil subsidies, rent control, & minimum wage

6. Price Floors Lead to Excess Supply When a government wants to keep prices from going too low to protect producers who feel the market isn’t adequately providing income, it sets a price floor: a minimum price set by the government to prevent prices from going too low

7. The minimum wage is another price floor. The minimum wage: the lowest hourly rate, or wage, that employers can legally pay their employeesminimum wage

8. Effects of Minimum Wage

9. Assignment! With a partner and a computer, research to find 3 pieces of evidence (not the same as pros and cons of raising minimum wage) for and against raising minimum wage. After analyzing the evidence, develop an opinion on minimum wage

10. Price Ceilings Lead to Excess Demand When a government wants to keep prices from going too high, it sets a price ceiling. A price ceiling: a maximum price set by the government to prevent prices from going too high

11. Price Ceilings Lead to Excess Demand Governments impose price ceilings to enable consumers to buy essential goods or services they wouldn’t be able to afford at the equilibrium price. Price ceilings are usually established in response to a crisis, such as war, natural disaster, or widespread crop failure

12. 11/10 DO NOW Is minimum wage a price floor or price ceiling? Does a price floor lead to excess supply or excess demand?

13. Price Ceilings Lead to Excess Demand The best-known form of price ceilings in the United States today is rent control. Rent control: a legal limit on the amount a landlord can charge a tenant; a price ceiling on rentsrent control Rent control

14. Price Ceilings Lead to Excess Demand

15. Dealing w/ Excess Supply & Demand: Rationing & Black Markets Price controls lead to surpluses and shortages because they prevent markets from reaching a market-clearing price. The excess supply and demand that arise must be addressed outside the market, which leads to black markets and rationing

16. Dealing w/ Excess Supply & Demand: Rationing & Black Markets When shortages occur, the government may impose rationing. Rationing: the controlled distribution of a limited supply of a good or service. Shortages can also give rise to black markets: an illegal market in which goods are traded at prices or in quantities higher than those set by law.black markets

17. Why Ending Price Controls Is Difficult At this point you might be wondering why, if price controls are so harmful to markets, the government doesn’t just get rid of them.price controls The answer to this question has more to do with politics than economics.

18. Why Ending Price Controls Is Difficult The political pressure on elected officials to intervene in the market when prices rise and fall rapidly can be intense. And although price controls are inefficient, many people believe that they further the goal of economic equity Some people—farmers, people who live in rent-controlled apartments, workers who earn minimum wage, benefit from it rent-controlled

19. Assignment! Choose an example of a price floor imposed a government in the past or present or choose an example of rationing or a good sold in the black market. Research the 3 positive and 3 negative effects of that policy or in the case of the black market good, 3 reasons why that good had to be sold in the black market. Then, form an opinion on whether or not you think that policy was a positive or negative for society Some examples of price floors and ceilings imposed by government: Price Ceilings: Rent Control in NYC, State Farm Insurance in Florida, Usury Laws, Gas price controls in the 1970s