Look At These Prices

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Look At These Prices!
ECON 1101 Economics for Non-Majors

• Chapter 5

If government were a product, selling it would
be illegal. P.J. ORourke
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Tinkering With Markets

• In free market systems, prices result from
  interaction of market forces.
• In mixed systems, market forces are not always
  allowed to operate unhindered.
• Some prices are under legal control of government.

Ch 5 Look at These Prices!
Minimum prices are set to benefit sellers of
goods. Maximum prices are set to benefit buyers
of goods.
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Tinkering With Markets

• Are these controls effective?
• Do they achieve the intended results?
• Do they improve the market, maximize well being?

Ch 5 Look at These Prices!
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Tinkering With Markets
Price Ceilings

• Maximum prices allowed by law
• Must be below equilibrium to be effective.
• Two main purposes
• Keep inflation in check
• Keep prices of certain goods and services within
  reach of lower income people.

Ch 5 Look at These Prices!
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Tinkering With Markets
Price Ceilings
P
S
Ch 5 Look at These Prices!
PE
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QE
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Tinkering With Markets
Price Ceilings
P
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Ch 5 Look at These Prices!
PE
Maximum price
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Shortage, QDgtQS
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Price Ceilings Rent Control

• Households choose how many dollars to allocate to
  housing based on incomes, other expenses.
• Some larger cities placed ceilings on rent to
  ensure availability of affordable housing for
  lower incomes.
• Household mobility - If rents increase,
  households move to smaller places, get roommates,
  etc.
• Produces market shortage of housing.

QE
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Effects of Rent Control

• Housing Shortage
• Not all households that want housing at that
  price can find it.
• Housing mobility cannot take place. People dont
  leave home, share when they dont have to, dont
  downsize or upsize when they need to.
• People live further from employment than they
  would otherwise.
• Costs Not Kept Down for Everyone
• Under table payments commonly made for
  available apartments.
• Black Market
• Profit Incentives Removed, Supply Does Not
  Increase
• Other ventures become more profitable than real
  estate.
• Example Paris almost no new rental housing
  built between 1914 and 1950.
• Supply decreases in long run as landlords give up
  and change use of property.

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Ch 3 Govt. Price Controls
Effects of Rent Control (cont.)

• Housing Quality Deteriorates
• Lower quality for same price same quality at
  higher price.
• Landlords cannot afford maintenance.
• Resource Misallocation
• Households value housing at higher price.
• Want MORE resources allocated to housing, not
  less.

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Tinkering With Markets
Price Floors

• Minimum prices allowed by law
• Must be above equilibrium to be effective.
• Main purpose
• Increase incomes of sellers of the good or
  service.

Ch 5 Look at These Prices!
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Tinkering With Markets
Price Floors
P
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Ch 5 Look at These Prices!
PF
PE
D
0
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QD
QS
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Tinkering With Markets
Price Floors
P
S
Ch 5 Look at These Prices!
Surplus, QDltQS
PF
Minimum price
PE
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QD
QS
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• This is the market for minimum wage labor.
• Demand for labor is a derived demand (Demand is
  dependent on demand for the product being
  produced).
• Employers will hire up to the point where MCMB
  (where wage contribution to output)
• Supply curve represents workers available for
  jobs at various wages.

Price Floors Minimum Wage
P (WAGE)
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PF
PE
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QD
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Ch 3 Govt. Price Controls
Effects of Minimum Wage (Some win, some lose)

• Increased Unemployment in Minimum Wage Jobs
• Price floor results in surplus of minimum wage
  labor.
• Qty of labor demanded by employers is less than
  quantity of labor supplied by workers at higher
  wages.
• When required to pay ALL minimum wage workers a
  higher per person wage, employers will not be
  able to employ as many workers.
• Workers impacted most young minority males.
• Higher Incomes for Minimum Wage Workers Still
  Employed
• Though more workers are unemployed, those that
  remain employed earn higher wages.
• Does Not Impact Poverty Rates
• So few of those working for minimum wage are head
  of households, it does not tend to pull families
  out of poverty.

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