CHAPTER 6 Flashcards
What happens if prices are fixed below market clearing
Shortages develop (quality demanded greater than quantity supplied)
Consumers frustrated
Quantity sold = quantity supplied only
When prices are fixed above market clearing
There is a surplus ( quantity supplied greater than quantity demanded )
Quantity sold = quantity demanded only
What happens when governments fix prices
Smart choices of consumers and businesses are not coordinated and don’t function well.
Quantities adjust to whichever is less — quantity supplied or quantities demanded
Rent control and price ceiling
Example of price ceiling — maximum price set by government, making it illegal to charge a higher price
Costs of rent control
Like any fixed price rent control ruin coordinating forces of well functioning markets.
They are in Efficiency not and reduce total surplus
Housing shortage
Subsidizing well of tenants
Where is rent control fixed price set
Below the marketing clearing rent creating a shortage
Alternative to rent control
Government subsidies to help the poor pay rent and government supplied housing
Minimum wage law and price floor
Example of price floor — minimum price set by government, making it illegal to pay a lower price
Input markets
Businesses buy the inputs they need from households to produce products
Output markets
Businesses sell their products to households
How do governments interact in certain markets
They set the rules of the game
Interact in output markets with rent ceilings and input markets with minimum wages
Benefit of minimum wage
Political benefit less money spent
Government is doing something to help the working poor
What happens if governments set minimum wage above the market clearing price
The quantity supplied by households is greater than quantity of labour demanded by businesses
Creating unemployment
Costs of minimum wage law
Inefficiency in labour market
What is unemployment created by minimum wage dependent on
Elasticity of business demand for unskilled labour