Introduction to Microeconomics -Price Controlstrols

8/13/2019 Introduction to Microeconomics -Price Controlstrols

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Prabudda Missaka s3211475 Page 1

3. PRICE CONTROLS / SURPLUS

WHY GOVERNMENTS POSE PRICE CONTROLS

1. To help poor2. For rent subsidies3. Wage subsidies4. Due to unfair market income

TWO TYPES OF PRICE CONTROLS

1. Price ceilingmaximum price a good can be sold2. Price floorminimum price a good can be sold

PRICE CEILING (EX, RENT CONTROL)

TWO TYPES OF PRICE CEILING

1. Below equilibrium priceBinding (there is an effect on free market equilibrium)this causes ashortage in the market

2. Above the equilibrium - Non binding (No practical affect)

EFFECTS OF A PRICE CEILING

1. Drop in supplysuppliers cant supply at the same price2. Increase in demandbecause of the drop of the price3. This crate a shortage4. Could create black markets


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PRICE FLOOR (EX, MINIMUM WAGES)

TWO TYPES OF PRICE FLOORS

1. Below the equilibrium priceno practical affect2. Above the equilibrium pricehas an affect

EFFECTS OF THE PRICE FLOOR ABOVE EQUILIBRIUM PRICE

(in this case price of a good is higher than the equilibrium price)

1. Decrease in quantity demanded (consumes have to pay more)2. Increase in quantity supplied (suppliers receive more money)3. Result SURPLAS

RENT CONTROL

AFFECTS OF THE RENT CONTROL IN THE SHORT RUN

Supply and demand of houses are relatively inelastic Small initial shortage Reduced rentsEFFECTS OF THE RENT CONTROL IN THE LONG RUN

Not apartments being built Failing to maintain properly People find their own apartments Induce more people to move in to cities Large shortage of housing Governments pose price


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Initially supply of houses if inelastic

-In the long run houses become elastic and numbers drop

- As result of the low rents, demand increases

simultaneously

EFFECTS OF MINIMUM WAGES

Unemployment(demand for labour decreases) Higher income for workers who have jobs Lower income for workers who do not have jobs Highly skilled labour market is not affected Teen age labour market is affected Some decide to drop out of school due to higher wages but subsequently become unemployed

TAXES

Taxes on sellers of a good

1. Buyers and sellers share the burden of tax2. Buyers pay more3. Sellers receive less

TAXES OF BUYERS OF A GOOD

1. Initial impact on the demand2. Lower equilibrium price3.

Lower equilibrium quantity

4. Reduces the size of the market.


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WHAT IS TAX INCIDENCE?

Tax obligations between buyer and sellers

WHO PAY THE TAX

1. Elastic supply, Inelastic demand = Buyer pay most of the tax2. Inelastic supply, elastic demand = Seller pay most of the tax


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WELFARE ECONOMY

Study of how allocation of resources affects economic wellbeing

SURPLUS

Consumer Surplus = Willingness to Pay PriceActual Price

Producer surplus = amount that a producer receiveamount they are willing to accept

Market surplus = sumof all consumer surpluses

Marginal buyers : Willingness to pay is equal to market price


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MEASURING CONSUMER SURPLUS


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CALCULATING CONSUMER SURPLUS


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Introduction to Microeconomics -Price Controlstrols