ECON 1000 Lecture Notes - Lecture 3: Price Ceiling, Price Floor, Economic Equilibrium

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Two possible out comes: (price ceiling is 4$) The price that balances supply and demand = 3$ This price ceiling is not binding: (price ceiling is 2$) The equilibrium price of 3$ is above the ceiling. When a shortage occurs: sellers must ration the scarce goods amongst the large amount of buyers. Free markets ration their goods with prices: those willing to pay the higher prices can have the goods. Rent control in the long & short run. Two possible outcomes: (price floor is 2$) 3$ is above the floor not binding. Market forces naturally move it into equilibrium and the price floor has no effect: (price floor is 4$) Equilibrium price (3$) is below the floor. The floor is now a binding constraint on the market. Once the price hits the floor it cant move further. The qs exceeds the qd = surplus. Tax incidence: how the burden of taxes is shared among participants in the market.

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