ECO100Y1 Lecture Notes - Lecture 4: Price Ceiling, Market Clearing, Working Poor

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bluegrasshopper710

18 Jan 2018

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Government sometimes impose price ceilings [example, rent controls] or price floors [example, minimum wages]. When governments interfere with the functioning of markets, there are often unintended consequences. Insight: dd and ss should be drawn and the impact assessed. If rent [price] ceiling is beneath the market clearing price, there is a shortage. Note: if rent [price] ceiling is above the market clearing price, it has no effect on the market. Economic impact of rent controls: create shortages (demand exceeds supply, discourage construction and maintenance of rental housing. But do rent controls help the disadvantaged: to some extent, but at the above cost. If minimum wage rate [price] floor is above the market clearing price, there is a surplus. Note: if minimum wage rate [price] is beneath the market clearing price, it has no effect on the market. Advantage: raises income of the working poor.

Related Questions

1.) An excise tax on a good typically reduces the net price received by the seller. (TRUE/FALSE)

2.) The burden of an excise tax on gasoline falls entirely on consumers of gasoline. (TRUE/FALSE)

3.) Rent controls are one of the few examples of a price floor in market economies. (TRUE/FALSE)

4.) Imposing a price ceiling below the equilibrium price of a good often leads to_____.

A) A greater supply of the good

B) A black market for the good

C) A rightward shift of the supply curve for the good.

D) A leftward shift of the demand curve for the good.

E) All of these

5.) Which of the following is true of price floors and ceilings?

A) Lead to the same price and quantity as in competitive market.

B) Lead to technical efficiency

C) Cause the demand curve to shift left

D) Usually result from government intervention

E) Cause the supply curve to shift right.

6.) Price ceilings often lead to black markets. (TRUE/FALSE)

7.) When minimum wage is above the equilibrium wage what occurs?

A) There will be a shortage of labor

B) There will be no effect on the number of people employed

C) There will be an increase in unemployment rate

D) There will be a decrease in unemployment rate

8.) An excise tax on a good typically reduces the price paid by the consumer (TRUE/FALSE)

9.) If a price ceiling is below the equilibrium price is imposed on a market, it will cause the quantity demanded to rise and the quantity supplied to fall. (TRUE/FALSE)

10.) Price floors often lead to black markets. (TRUE/FALSE)

11.) If an excise tax is imposed on restaurant meals what occurs?

A) Fewer meals will be produced and sold

B) More meals will be produced and sold

C) Market price of the meals will fall

D) Government tax revenue will fall.

mauveyellowjacket715

Questions 1 and 2 do not need to be answered, they are just there for questions 3 and 4. Only bolded need answered.

1.Graph the following market demand function Q = 300-25P, plotting P (prices) on the vertical axis, and Q (quantity), on the horizontal axis. Next, show how much quantity demanded changes when the price of the good given by this demand function increases from $5 to $7?

2.Consider that the demand curve in part (a) above represents the market demand for a steak burger meal in a local area. This local area has three fast-food restaurants that exclusively produce these meals, and they are owned by Sam, Sony, and Sheila. Their supply curves for a steak burger meal are given as follows:

Sam's Eatery		Sony's Hot Meals		Sheila's "To Go"
Price ($)	Quantity	Price ($)	Quantity	Price ($)	Quantity
2.50	0	2.50	5	2.50	5
5.00	15	5.00	20	5	15
8.00	28	8.00	42	8.00	30
10.00	35	10.00	50	10.00	40
12.50	55	12.50	75	12.50	60
15.00	80	15.00	100	15.00	80

3.Consider the exercise in Question 2. The government now declares that steak burger meals in that locality should sell for $5.00. Given the correct answers in Question 1(b), would this represent a price ceiling or a price floor? Explain. Further, determine what would be the quantity of shortage or surplus that would exist in this market, and be explicit whether it is a surplus or a shortage and explain why.

4.Given the readings you looked at on price controls, what other problems typically arise, besides shortages or surpluses, when price controls are put in place within well-functioning markets?

bronzeskunk888

I've completed this but I want to check my answers. Thanks

1) List and briefly explain three economic variables that shift the Demand Curve.

2) Define opportunity cost. How is opportunity cost used to determine comparative advantage?

3) In the market for calculators we observe that the price has fallen and more calculators are being sold. What might have happened to cause this change?

4) The price of gasoline rises. What would we expect to see happen in the market for cars with high gas mileage (like the Prius)?

5) What is the effect of a price floor (a price set above equilibrium) in the sugar market. Why does the government impose price floors?

6) Define the price elasticity of demand. Why is this concept important in economics?

7) Define the income elasticity of demand. Why is this concept important in economics?

8) List and briefly explain three economic variables that shift the Supply Curve.

9) A firm lowers of price of its product by 10% and consumers buy 5% more of the product. What is the price elasticity of demand for the product?

10) If the price elasticity of demand for a product is elastic, explain what will happen to total revenue when the price is decreased.

11) What is the difference between a change in quantity supplied and a shift in supply?

12) Write out the equation for the arc price elasticity of demand using symbols. Then write out the equation using the following numbers: the price increases from $8 to $10 and the quantity demanded falls from 3 units to 2 units. (Do not calculate the equation.)
Three Questions (no choice)

Long Answer Questions (20 points each)

Be certain to label all graphs. Write all explanations in complete sentences.

1) Draw a supply and demand graph for the market for oranges.

Illustrate and explain what happens with when a freeze destroys part of the crop.

2) Draw an increasing cost Production Possibilities Curve (PPC) for the U.S. with computers on the horizontal axis and textiles on the vertical axis.
a) What is the definition of a PPC

b) Choose a point on the PPC. What does this point represent?

c) Illustrate the opportunity cost of producing more computers.

d) Explain a point inside the PPC.

e) Explain a point outside the PPC.

f) Technological change reduces the cost of producing computers and textiles, illustrate and explain what happens in the graph.

g) Choose a new point that represents production and consumption after technological change.

h) Where does the U.S. produce and consume relative to before technological change.

i) Illustrate and explain the opportunity cost of producing more computers after technological change.

3) Define the price elasticity of demand. What does elastic, inelastic and unitary price elasticity of demand mean? For each of the three values of the price elasticity of demand explain what happens to quantity demanded and total revenue when the price of the product is increased? What about when the price of the product is decreased?

4) Using a supply and demand graph in the market for bread, illustrate and explain the effect of a price ceiling (Price set below equilibrium price).

Why would the government impose such a price ceiling?

How is the available bread distributed to consumers when there is a price ceilin

ECO100Y1 Lecture Notes - Lecture 4: Price Ceiling, Market Clearing, Working Poor

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