MICRO CH6 Flashcards
Chapter 6
- 1 Explain how government fixed prices cause quantities to adjust and market coordination to fail
- 2 Describe price ceilings and explain the unintended consequences of government minimum wage laws.
- 3 Describe price floors and explain the unintended consequences of government minimum wage laws.
- 4 Explain government policy trade offs between efficient and equitable outcomes.
- 5 Describe two equity concepts and how to use positive economic thinking to achieve a normative policy goal.
Fixed Prices in Markets
They prevent markets from functioning well and prevents the businesses and individuals from making smart decisions.
When prices are fixed, the only way shortages or surpluses disappear is by quantities adjusting to which ever is less, quantity supplied (shortage) or quantity demanded (surplus)
Price Ceilings
Maximum price set by government, making it illegal to charge higher price
ex) rent controls.
“No more than this price”
Rent controls
Form of price fixing, governments set maximum rent, that limits rent prices.
Benefits
- Governments do not have to spend any money, it’s just a control law, don’t have to build houses or such.
- Rent controls reduce amount of money to pay for rent, which allows the people able to get rent allocate more money in to other necessities.
Costs.
- Rent controls put a brake on the price index, so the quantity is the only variable to shift. It usually creates a shortage, leading to cripple the coordinating forces of well-functioning markets.
Problems of rent controls
Gives the landlords an upper hand, while tenants compete for scarce apartments. (“Key money problem”)
Subsidize the relatively rich tenants who are able and willing to pay more for the rent, they just get to rent for that much more benefit.
Price Floors
Minimum price set by government, making it illegal to charge lower price.
ex) Minimum wage
“No less than this price.”
Living wage
$20 per hour, enough to allow an individual in a Canadian city to live above the poverty line.
Benefits and costs of Price floors
ex) Minimum wage
Benefits
Those who get to keep working after the minimum wage is set, get a raise.
Costs
There is a surplus in the labour market. If prices could adjust, there will be competition between workers until wages fell towards market clearing price.
But since prices are fixed, quantities adjust, creating unemployment.
Efficient Market Outcomes
Outputs go to those most willing and able to pay.
Efficient market outcome may not be fair or equitable.
Consumers compete with each other for outputs of businesses and products and services go to those most willing and able to pay.
When prices are fixed below market clearing
Shortages develop (Quantity demanded greater than quantity supplied) and consumers are frustrated.
Quantity sold = Quantity supplied only.
When prices are fixed above market - clearing
Surpluses develop (quantity supplied greater than quantity demanded) and businesses are frustrated.
Quantity sold = Quantity demanded only.
When prices are fixed
Quantities adjust to whichever is less - Quantity Supplied or Quantity Demanded.
Governments can fixing prices
Governments can fix prices, but can’t force businesses (or consumers) to produce (or buy) at the fixed price.
Businesses can reduce output or move resources elsewhere.
Consumers can reduce purchases or buy something elsewhere (substitutes)
Rent controls’ unintended consequences
Create housing shortages, gives landlords the upper hand over tenants.
Subsidize well-off tenants willing and able to pay market-clearing rents
inefficiency, reducing total surplus below market clearing amounts.
Alternative policies to help homeless that do not sacrifice market flexibility
Government subsidies to help those who are pooor pay rent.
Government supplied housing.
All policies have opportunity costs.
