Microeconomics Ch 5

Minimum wage law as a binding price floor

A binding minimum wage is a price floor above the current equilibrium wage, WE. At $10 per hour, the number of workers willing to supply their labor (SSR) is greater than the demand for workers (DSR). The result is a surplus of workers (which we recognize as unemployment). Since the supply of workers and demand for workers both become more elastic in the long run, unemployment expands (SLR > DLR).

Rent control

A local government caps the price of apartment rentals to keep housing affordable. But it doesn't work. In fact, it doesn't help poor residents of a city to find affordable housing or gain access to housing at all. In addition, these policies contribute to dangerous living conditions. Example (Mumbai India)

Price controls

An attempt to set prices through government involvement in the market. In most cases, and certainly in the United States, price controls are enacted to ease perceived burdens on society.

Nonbinding minimum wage

An increase in the minimum wage from $7 to $9 remains nonbinding. Therefore, it will not change the demand for labor or the unemployment rate. If the minimum wage rises above the market wage, additional unemployment will occur.

Rent-controlled apartments in long and short run

Because rent-controlled apartments are vacated slowly, the supply of units contracts in the long run and the supply curve becomes more elastic. Demand also becomes more elastic in the long run, causing the quantity demanded to rise. The combination of fewer units available to rent and more consumers looking to find rent-controlled units leads to a larger shortage in the long run.

Price ceiling

Creates a legally established maximum price for a good or service. In the next section, we will consider what happens when a price ceiling is in place.

Binding price floor

For a price floor to have an impact on the market, it must be set above the market equilibrium price. And with a binding price floor, the quantity supplied will exceed the quantity demanded.

Black markets

Illegal markets that arise when price controls are in place. Will form when a binding price ceiling creates a shortage.

In the long run...(price ceiling)

Increased elasticity on the part of both producers and consumers makes the shortage larger than it was in the short run. Consumers adjust their demand to the lower price and want more bread. Producers adjust their supply and make less of the unprofitable product. As a result, products become progressively harder to find. Black market prices decrease

Price gouging

Places a temporary ceiling on the prices that sellers can charge during times of national emergency until markets function normally again.

Price floors

Result from the political pressure of suppliers to keep prices high. Create legally established minimum prices for goods or services. Keeps prices from falling. Create a surplus because suppliers want to supply more at the higher price and consumers want to purchase less because of the high cost.

In the short run...(price ceiling)

Shortages and black markets develop

Nonbinding price floor

Since the actual market price is above the legally established minimum price (Pfloor), the price floor does not prevent the market from reaching equilibrium at point E. Consequently, the price floor has no impact on the market. As long as the equilibrium price remains above the price floor, price is regulated by supply and demand.

Minimum wage law

The lowest hourly wage rate that firms may legally pay their workers.

Nonbinding price ceilings

When a price ceiling is above the equilibrium price, we say it is nonbinding. But since the market equilibrium (E) occurs in the green area, the price ceiling does not influence the market; it is nonbinding. As long as the equilibrium price remains below the price ceiling, price will continue to be regulated by supply and demand. Since there is rarely a compelling political reason to set a price ceiling above the equilibrium price, nonbinding price ceilings are unusual.

Binding price ceiling

When a price ceiling is below the market price, it creates a binding constraint that prevents supply and demand from clearing the market. The price ceiling prevents sellers from increasing the price and causes them to reduce the quantity they offer for sale. As a consequence, prices no longer signal relative scarcity. Consumers desire to purchase the product at the price-ceiling level, and this creates a shortage in the short run; many will be unable to obtain the good. As a result, those who are shut out of the market will turn to other means to acquire the good. This establishes an illegal market for the good at the black market price. A binding price ceiling disrupts the ability of the market to reach equilibrium.

In the long run...(price floor)

When a price floor is left in place over time, supply and demand each become more elastic. This leads to a larger surplus (QS > QD) in the long run. Since sellers are unable to sell all that they produce at $6 per gallon, a black market develops in order to eliminate the glut of milk.