Econ Chapter 5 (Price Controls)

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Black Markets

Illegal markets that arise when price controls are in place, they also charge higher prices.

Price Ceiling

Legally established maximum price for goods or services. Example: no one can charge more than $.50 for a loaf of bread (if the price drops the quantity demanded increases, at the same time the quantity supplied will fall because producers will receive less profit for their effort). THIS CAUSES A SHORTAGE and lower the quality.

Price Floors

Legally established minimum price for a good or service (if you are doing a handstand you need the floor for support). This causes a surplus because producers will produce more due to the high prices but quantity demanded will fall.

Minimum Wage

Lowest hourly wage rate that firms can legally pay their workers. A higher minimum wage will lower the quantity of work demanded, they will replace workers with machines etc. As a result, minimum wage jobs will be harder to find an unemployment will rise.

Price Controls

An attempt to set prices through government involvement in the market, enacted to ease burden.

Rent Control

A price ceiling that applies to the housing market, local governments cap the price of apartment rentals to keep housing affordable. Example: This is dangerous because in India when something is broken there is not enough money to fix it. These require that landlords provide basic service but they keep maintenance to a minimum. When a unit is vacated, the property is no long subject to rent control, since these are passed from generation to generation rent control doesn't serve its OG purpose.

Emergency Price Control Act

Designed to keep inflation in check

Binding Price Floors in the Long Run

People look for substitutes

Price Gouging Laws

Place a temporary ceiling on the prices that sellers can change during times of emergency, the ability to charge higher prices is an incentive for producers to make more (if there is no price change and high demand they will not make more).

Long Run and Price Ceilings

These products become progressively harder to find.

Non-Binding Price Ceilings

When a price ceiling is above the equilibrium price, if the market equilibrium occurs in the green area, the price ceiling does not influence the market.

Binding Price Ceiling

When a price ceiling is below the market price, it creates a binding constraint preventing supply and demand from clearing the market. Shortages cause the price to rise but this can't happen because of the ceiling. This has caused two unexpected consequences, smaller quantity of bread and higher prices on the black market.


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