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
When businesses have few substitutes
Demand for unskilled labour is inelastic a rise in wage produces a small response in decreased quantity demanded
When businesses have a lot of substitutes for labour
Demand for labour is elastic
Rise in minimum wage produces a large decrease in quantity demanded
Alternatives to minimum wage policy
Help working poor training programs and wage supplements
If products produced are valued
The market is well functioning meaning outputs go to those most willing to pay
Efficient market outcome
May not be fair or equitable
Deliver to those most willing to pay
Marginal cost of sellers matches marginal benefit of buyers
Consumers who don’t buy at equilibrium
2 categories
1 . Marginal benefit is less than price —- doesn’t find the product worth the price
2 . Marginal benefit is greater than price —- can’t afford it but wants it
Canadian healthcare
Consumers pay zero suppliers fixed by government
Results in shortages and inefficiencies
Quantity demanded exceeds quantity supplied
Positive statement
Facts
Normative statements
Value judgements
Equal outcomes and equal opportunities
Everyone gets the same amount
Everyone has the same opportunities, but the outcomes can be different
When prices are fixed
Quantities adjust to whatever is less
Market clearing before incident
Quantity demanded equals quantity supplied
When is there a price floor
When price is set above equilibrium price
When is price ceiling
When price is set below equilibrium price
Horizontal line on graph
Left leaning politician
Thinks equality of outcomes more important than equality of opportunity
When a business exists an industry
Market clearing price rises
Eliminating rent controls
Landlords create additional rental housing
Increase in rental units is largest when supply is elastic
Price ceiling set above equilibrium price
Results in equilibrium price
When governments fix below equilibrium price
Price ceiling
There is a shortage
Price control is effective
There is deadweight loss
