ECON 2302: CH. 6 Study Guide

Suppose the government enacts a price floor on milk, which leads to a surplus in the market. How will the government then attempt to equalize supply and demand?

Attempt to Equalize Supply and Demand: ~ restricting the supply of milk This is problematic because reducing supply will prevent dairy farmers from making enough profit on their milk. ~ stimulating additional demand for milk This is more complicated than it sounds and results in even more unintended negative consequences. Not an Attempt to Equalize Supply and Demand: ~ requiring suppliers to donate all surplus milk to developing countries While the government will attempt to restrict supply, they do not dictate what sellers do with the milk they have not sold. ~ The government has no option except to remove the price floor on milk. The government can intervene on either the supply side or the demand side. The unintended effects of price floors put pressure on governments to rectify the issue of surpluses. The strategies implemented often create even more negative consequences.

What form of illegal activity will take place in response to a shortage of milk caused by price controls?

Black markets will develop to provide customers with what they want. These are illegal markets that arise when price controls are implemented.

_____ are illegal markets that emerge in response to price controls. A few buyers are able to obtain the good at the open-market price; the rest must resort to illegal means. The additional demand is met by _____ suppliers selling at much _____ prices.

Black markets, underground, higher People who continue to demand a good might choose to engage in illegal activity and purchase it in underground markets for a higher price. The black-market dealers will help reduce the shortage, but the government will not approve their actions.

Place the following events in the order they will occur over the short run once a binding price control is imposed in the labor market.

I. A binding minimum wage is implemented. II. The cost of hiring workers rises. III. The quantity of labor demanded decreases. IV. Unemployment sets in. The implementation of a minimum wage increases the cost of labor, leading employers to look for alternatives while employing fewer workers. This contributes to a decline in available jobs and results in a higher unemployment rate.

There is a prevailing market price for coffee in the world. Budget brands of coffee tend to sell at a price below the overall price of coffee, and fair-trade coffee tends to sell at a price above the overall prevailing price of coffee. Suppose a binding price floor in the coffee market is enacted, and that the price floor is below the price of fair-trade coffee. What will happen to the sales of fair-trade coffee?

The sales of fair-trade coffee will increase. The binding price floor increases the price of all coffee that was formerly sold below the price floor. This closes the gap between the price of fair-trade coffee and the price of all other coffee. All other things equal, this will increase the sales of fair-trade coffee.

Rent control is an example of a price floor that is enacted in order to help people who cannot afford to rent homes at the market price.

False Rent control is an example of a price ceiling, not a price floor.

Price floors impose mandatory _____ prices for goods and services. When the price floors are binding, they set a _____ for a good or service than the one dictated by supply and demand, in order to encourage manufacturers to _____. Another area in which legislators impose price floors is wages. This approach is reflected in _____ laws.

minimum, higher price, produce more, minimum wage While consumers like low prices, legislators are pressured by suppliers to establish higher prices, in order to make production more profitable. This prevents the price of the good or service from being established by supply and demand and prevents the market from functioning properly.

Price gouging protections act as a _____ under normal market conditions. Price gouging laws typically go into effect following an emergency, usually _____. These emergencies often cause an increase in the _____ of goods and services.

nonbinding price ceiling, a natural disaster, equilibrium price Price gouging laws create a shortage by imposing a legal price limit on goods and services that prohibits the new equilibrium price from being legally recognized.

If the government attempts to help the disadvantaged by enacting a binding _____ on gasoline, it will result in unintended consequences. The new artificially low price will increase the _____ while simultaneously lowering the _____, this situation is called a _____.

price ceiling, quantity demanded, quantity supplied, shortage When this shortage occurs there will be long lines at gas stations, with many people not being able to obtain the good. A black market may arise as a response in order to help reduce the shortage.

If price does not have the ability to adjust when demand increases, there will be a _____ of the product. Instead of being helped by the price control, devastated communities are _____ affected by price gouging legislation.

shortage, negatively Price controls imposed by the government to address the aftermath of natural disasters create unintended consequences that negatively affect desperate communities, as entrepreneurs are forbidden from selling goods and services that reflect the equilibrium price dictated by current conditions.

For what purpose are price controls generally enacted in the United States?

to alleviate public anxiety regarding perceived burdens on society The message of price control laws is that goods and services required for a normally happy life should be within the reach of people with limited means.

In economics, we call a surplus of labor "_____," and we call price floors in labor markets "_____."

unemployment, minimum wages Surplus labor is called unemployment, and binding price floors in the labor market are known as minimum wages.

Suppose this graph shows the market for milk in California. If the California legislature imposes a price floor of $6 per gallon of milk, what price would the black market set for each gallon of milk illegally sold to consumers?

$2 This is the correct price of milk established by the black market as it accounts for the quantity supplied as a result of the surplus, and where that new quantity supplied meets demand.

Suppose the equilibrium price for medicinal (isopropyl) alcohol is $7 per pint. What would be the lowest possible binding price floor on a pint?

$7.01 That price is just barely above the equilibrium price.

If the government imposes rent control under the circumstances shown, what will be the resulting long-run shortage?

101 apartments This is the proper long-run shortage: the difference between long-run quantity supplied and long-run quantity demanded.

Assuming that the equilibrium wage is $7 and the minimum wage is set at $10, how many workers will be unemployed in the long run?

150 workers This is the difference between 175, the number of workers willing to work at the minimum wage in the long run, and 25, the number of workers for which there are jobs in the long run.

If the government imposes rent control under the circumstances shown, what is the resulting short-run shortage?

53 apartments This is the proper short-run shortage: the difference between short-run quantity supplied and short-run quantity demanded.

If, with the demand and supply curves shown, the government implements a price ceiling of $0.50 per loaf, what is the size of the resulting shortage?

90 loaves The shortage is quantity demanded minus quantity supplied, in this case 130 minus 40.

Why do binding price floors cause a deadweight loss?

A binding price floor prevents some mutually beneficial exchanges from happening. Deadweight losses occur when transactions that would have been mutually beneficial and generated consumer and producer surplus are not allowed to happen.

Suppose that prior to Hurricane Irma, the market price for a generator in Florida was $530. After Irma, the market price rose to $900, as shown in the graph. Select the area of the graph that represents the resulting shortage if the government were to implement a $700 maximum price gouging law for selling generators after the disaster of Hurricane Irma.

Click in gap between the second teal line labelled "D after" and the orange supply line, on the dotted line labelled "P legal maximum = $700" The shortage reflects a gap between the quantity of generators supplied at $700 and the quantity demanded at that same price. The government's price maximum of $700 per generator binds the market and prevents it from being governed by the laws of supply and demand. If the market were functioning properly, the price per generator would be $900. The decrease in quantity supplied when the price is $700 and the increase in quantity demanded for this lower price created a shortage of generators.

Let's assume that a state increases its minimum wage from $8 to $11.35, while the equilibrium wage remains at a constant $10. Click on the area of the graph representing the unemployment that sets in when the minimum wage is raised.

Click on middle of top black line labelled "W new minimum = $11.35" This is the gap between the quantity of work demanded and the quantity supplied at the new minimum wage. Since the minimum wage is set above the market price, it creates a bind on the market and prevents it from functioning properly. If the price of labor is unable to reflect supply and demand, a gap between the amount of jobs supplied and those demanded leads to a shortage of jobs and unemployment.

In the aftermath of a hurricane, an entrepreneur buys generators at $530 each from a store in an area unaffected by the hurricane. He then sells them in the hardest-hit area for $900 apiece. What does the purchase of these generators by hurricane victims, at a 70% markup, say about the equilibrium price of generators following a natural disaster?

Correct Answer(s): ~ An increase in demand combined with a temporarily inelastic supply has caused the price to increase. Demand for generators would increase, resulting in the demand curve shifting to the right. This increases the price. ~ The effect of price ceilings is to make behavior like the entrepreneur's illegal. States have at times taken legal action against individuals who sell essential supplies and equipment at unlawfully high markup after natural disasters. ~ Those who voluntarily purchase the generators believe them to be worth the marked-up price. People who buy a generator believe that the value of the generator exceeds the price. Otherwise they would not have chosen to buy it. Incorrect Answer(s): ~ Any price ceiling imposed on generators in the affected area would create a surplus. Binding price ceilings create shortages, not surpluses. Keeping the price from rising means the quantity demanded increases and the quantity supplied falls, resulting in a surplus. Although price ceilings make behavior like the entrepreneur's illegal, the question remains whether the behavior in fact does any harm to people who make the choice to buy the marked-up goods.

Rent control is a good way for local city governments to provide affordable housing to low-income residents.

False Attempts to make housing more affordable through rent control end up making housing harder to obtain. More often than not, rent-controlled apartments are passed from generation to generation, and people who can afford to live elsewhere choose not to. This was clearly not the original purpose of rent-control laws.

Minimum wage laws are an example of a price ceiling that is enacted in order to help people earn a higher wage than they otherwise would, given the current supply and demand for labor.

False Minimum wage laws are an example of a price floor, not a price ceiling.

Price controls generally serve a positive economic function, as they compensate for the market's inability to regulate wages in certain sectors of the economy.

False Price controls such as minimum wage laws are rarely the win-win propositions that legislators often claim they are.

Unlike price ceilings, price floors lead to very positive effects when properly implemented.

False Price floors create many unintended effects—the main one being a surplus of the good.

Place the following events in the order they might occur once rent control is implemented in a crowded, impoverished neighborhood.

I. Apartment rental prices are capped by the local government. II. Property owners receive less income from their properties. III. Property owners cannot afford to maintain buildings properly. IV. Many apartment buildings become dilapidated. Mumbai, India, provides a real-world illustration of the disastrous consequences rent control can have.

Place the following effects of a long-run binding price ceiling in the order they will occur.

I. The market is at a natural equilibrium where the supply and demand curves cross. II. A binding price ceiling is imposed, forcing the open-market price below the natural equilibrium point. III. Consumers see they can save on each unit, while producers realize they will earn less. IV. Quantity demanded increases, while quantity supplied decrease. V. The shortage becomes so acute that consumers will choose substitutes. Another result, besides consumers' seeking substitutes, is the emergence of a black market.

Place the following events in the order they will occur, starting with the implementation of a price floor for heating oil.

I. The minimum price for heating oil is set at $6 per gallon, which is above the current equilibrium price. II. Refineries will produce more heating oil while consumers demand less. III. Producers will be stuck with unwanted heating oil. IV. Producers will be tempted to offer illegal discounts on heating oil. The lack of demand for heating oil, due to the higher price, pressures sellers to find alternative ways of selling the good to make up for lost profits. These alternatives usually come in the form of illegal deals and discounts, in order for sellers to avoid being stuck with unsold heating oil.

Match each type of price ceiling to its appropriate descriptions. I. The price ceiling does not influence the market. II. The price ceiling prevents supply and demand from clearing the market. III. The price ceiling is below the equilibrium price. IV. The price ceiling is above the equilibrium price.

I. nonbinding If the market is not impacted, it will continue to be regulated by supply and demand and is thus nonbinding. II. binding This creates a binding constraint on the market that impedes it from being regulated by supply and demand. III. binding This creates a shortage, which would be rectified by higher prices, but price ceilings prevent this from happening. IV. nonbinding As long as the equilibrium price is below the price ceiling, the market is not impacted. The price at which the price ceiling is set is what determines whether it is binding or nonbinding. If the price ceiling is above the equilibrium price, it will not impact the market and is thus nonbinding. If the price ceiling is below the equilibrium, then it is binding, as it creates a binding constraint on the market.

How has the international community sought to reduce the negative effects of price floors?

International treaties ban the practice of dumping surplus production. This practice remains in place, however, as developed countries claim they are doing this for humanitarian purposes.

Identify the negative consequences of establishing a price floor on milk.

Negative Consequence: ~ Sellers will be tempted to engage in illegal activity to recoup some of their costs due to milk that went unsold. Sellers that have large quantities of milk that are not being purchased will entice consumers with illegal deals and discounts. ~ There will be a surplus of milk. The higher price will incentivize dairies to produce more of the good. ~ There will be a decrease in the quantity of milk demanded. The quantity of milk demanded will decrease when the cost of milk reaches a price higher than the equilibrium price. Not a Negative Consequence: ~ Consumers will demand higher-quality milk as they are forced to pay more. Consumers will begin to decrease their demand for milk altogether and will eventually find alternatives to milk that are not bound by the price floor. Those who impose these price floors fail to acknowledge the unintended effects of their legislation. The government is then pressured to rectify the issues through strategies that produce additional negative effects.

If the government were to implement a price ceiling on disposable gloves of $0.50 per pair, how would the resulting shortage in available quantity of disposable gloves be represented on the graph?

Place the box containing "shortage" onto the X-Axis where quantity is To determine the number of units of a shortage, subtract the quantity supplied from the quantity demanded: Shortage = QD - QS. A shortage exists in the marketplace whenever the market price is set below the equilibrium price (PE). The equilibrium price is the price on the graph where the quantity demanded (QD) and quantity supplied (QS) are equal to each other.

Suppose the government enacts a binding price ceiling on ice cream. Identify the various potential decisions made by ice cream producers to compensate for the price ceiling and maintain profits.

Potential Decision: ~ discontinuing the production of fancier varieties Many of these varieties require more expensive ingredients and are generally more costly to produce. ~ lowering the quality of ice cream by using cheaper products This would reduce the input costs per carton. ~ reducing the size of each carton of ice cream This would reduce the cost of producing each carton and allow the firm to offset the artificially lower price. Not a Potential Decision: ~ hiring additional workers at a lower wage in order to meet demand Producers will be looking to cut costs in the midst of increasing demand and lower profits; hiring additional workers would add to the costs of production.

If a ceiling on the price of bread leads to the disappearance of higher-quality, specialty bread from store shelves, which production decisions might this reflect?

Production Decision: ~ Marketing is no longer aimed at upscale consumption. Since a price ceiling rules out upscale consumption, there is no sense in trying to encourage that kind of consumption through branding and shelving of upscale products. ~ Production shifts to a use of cheaper ingredients. This will lead to a decline in the production of fancier breads that require more expensive ingredients. ~ Specialty bread is available only direct from the bakery, to avoid transportation costs. The producers may still sell some specialty bread, but only when they can cut costs in some way to offset the artificially lower price. Not a Production Decision: ~ Customers are rapidly buying the limited number of loaves available. This may be true, but it is not a production decision. It is a demand phenomenon, not one of supply. In addition to producing less-expensive bread varieties, producers will reduce the size of each loaf in order to maintain profits. Each of these tactics is implemented as a response to the unintended consequences created by price controls.

A state imposes a minimum wage of $10 per hour when the equilibrium price is $7. The resulting labor surplus is greater in the long run than in the short run: long-run unemployment (LR) is greater than short-run unemployment (SR). Why does this occur?

Reason This Occurs: ~ The number of workers needed is smaller in the long run than the short run. Demand for labor is more elastic in the long run, as companies over time find ways to get by with fewer workers rather than pay the new, higher wage. ~ The number of workers who would be available at the new wage is greater in the long run than the short run. Supply is more elastic in the long run, since workers in non-minimum-wage jobs (working illegally, for instance) take time to adapt to the new wage situation. Not a Reason This Occurs: ~ The quantity supplied of labor has stopped exceeding the quantity demanded. As long as the wage floor is above the equilibrium price, the quantity supplied of labor will never meet the quantity demanded, due to the abnormal functioning of the market. ~ The supply and demand curves have become more inelastic. In the long run, workers and employers will both adapt to the new wage environment, making the demand curve more elastic. The expansion of labor surplus is a result of decreasing quantity demanded over the long term and increasing quantity supplied. Employers adapt to the higher wage, while workers are incentivized to seek work.

Why might politicians in a state or city enact a nonbinding minimum wage?

Reason to Enact Nonbinding Minimum Wage: ~ It allows politicians to claim credit for enacting policies that help workers without increasing unemployment or creating any deadweight loss. Nonbinding minimum wage laws are designed by lawmakers to create the "illusion" that the minimum wage is resulting in an increase in wages. This benefits politicians by giving them the support of individuals who are not aware of the real-world effects of the minimum wage. Not a Reason to Enact Nonbinding Minimum Wage: ~ It leads employers to create better working conditions out of fear that a binding law may soon be imposed. Creating better working conditions will have no effect on whether or not a minimum wage is implemented. Employers do not alter conditions for this reason. ~ It works to reduce the existing unemployment rate. Nonbinding minimum wage laws have no effect on the functioning of the market and would have no impact on current unemployment rates.

The graph below illustrates a binding price ceiling in both the long and short run. We can see that the shortage caused by the binding price ceiling is larger in the long run than it is in the short run. Another effect of binding price ceilings is the emergence of a black market. The price of the good in the black market can be found using a supply and demand diagram. First find the black-market price in the short run for this market. Then find the black-market price in the long run for this market. What happens to the black-market price between the short run and the long run?

The black-market price goes down in the long run. There is no general rule that the black-market price rises in the long run or that it falls in the long run. Whether it moves, and in which direction, depends on how the demand and supply elasticities interact.

Why are price floors implemented by governments?

They are a response to political pressure from suppliers to keep prices high. Although consumers like low prices, producers of goods and services urge political leaders to keep prices high.

After a minimum-wage hike, unemployment is worse in the long run than in the short run.

True Unemployment becomes worse as both the supply and demand curves flatten over time.

Select all of the statements that discuss one of the problems with price gouging laws that prevent prices from rising to the new market equilibrium after a disaster.

True Statement about Price Gouging: ~ Price gouging laws do nothing to address the underlying issues that cause shortages after a disaster. In fact, they often make the problem worse. Price gouging laws do nothing to mitigate the shortages caused by a disaster. By preventing prices from rising, they make the shortages worse than they otherwise would be. ~ When prices rise after a disaster, consumers are encouraged to consume less of the good and leave some for others to purchase; price gouging laws short circuit this effect. Rising prices after a disaster provide incentives for consumers to be more careful about their consumption of necessities. Price gouging laws make shortages worse by preventing prices from doing this important work. ~ When prices rise after a disaster, producers are encouraged to produce more of the good and bring it to the disaster area; price gouging laws short circuit this effect. Rising prices after a disaster provide incentives for producers to ramp up production and transport needed goods to the disaster area. Price gouging laws make shortages worse by preventing prices from doing this important work. False Statement about Price Gouging: ~ Price gouging laws reduce shortages after a disaster by keeping prices low. Price gouging laws exacerbate shortages by keeping quantity demanded too high and keeping quantity supplied too low for the current supply and demand of a good. ~ Price gouging laws keep prices low after a disaster. This forces consumers to buy less of the good than they otherwise would. Even in a disaster the law of demand holds. Lower prices have a higher quantity demanded and higher prices have a lower quantity demanded. ~ Price gouging laws keep prices low after a disaster. This forces producers to produce more of the needed goods. Even in a disaster the law of supply holds. Lower prices have a lower quantity supplied and higher prices have a higher quantity supplied. Price gouging laws are well intentioned, but their unintended consequences prevent the normal market process from helping to end the shortages caused by a disaster. In addition, the benefits of the laws are usually small and help only a lucky few.

The town of Willingham currently has no price regulations on cigarettes or e-cigarettes (nicotine vaporizers). The city council has grown concerned with the quickly rising popularity of cheap disposable e-cigarettes among 18-to-25-year-olds. To try to reduce e-cigarette usage, the city passes a price floor on e-cigarettes to keep retailers from offering the product at very low prices. After a year, the city council discovers that the use of e-cigarettes among 18-to-25-year-olds has indeed fallen by a large amount, but to their horror, the use of traditional cigarettes has increased by almost the same amount. Identify which of the following statements must be true for the price floor on e-cigarettes to have increased the sales of traditional cigarettes and smokeless tobacco.

True: ~ E-cigarettes and traditional cigarettes are substitutes. Customers substituted out of e-cigarettes and into regular cigarettes. That means the two goods are substitutes and the cross-price elasticity of demand between the two is positive. ~ The elasticity of demand for products that allows a consumer to inhale nicotine is inelastic. The average price of nicotine inhalation methods has increased but consumers continued to purchase them (even though they did shift from one method to another). This implies that the elasticity of demand overall for nicotine inhalation is inelastic. ~ The price floor on e-cigarettes was binding. The price of e-cigarettes must have risen, or the quantity demanded of e-cigarettes would not have fallen. That implies that the price floor was indeed above the market price and was binding. Not True: ~ E-cigarettes and traditional cigarettes are complements. If the cross-price elasticity of demand between the two is negative, then the two goods would be complements. An increase in the price of one would cause the quantity demanded to fall for both goods. ~ The elasticity of demand for products that allow a consumer to inhale nicotine is elastic. If the elasticity of demand overall for nicotine inhalation is elastic, then an increase in the average price of nicotine inhalation methods would cause demand to fall a lot overall. ~ The price floor on e-cigarettes was not binding. A nonbinding price floor would not affect demand for e-cigarettes and would not cause consumers to substitute into another nicotine inhalation method.

In an ideal world during a health crisis, both suppliers and consumers would behave in an altruistic manner, and suppliers would provide goods at a competitive market price. However, during the pandemic of 2020, neither consumers nor suppliers were acting as they would in a normal market, which led to government intervention in the form of price controls. More than 30 states enacted price-gouging laws (effectively price ceilings) in an effort to ease perceived burdens on consumers. Which of the following could occur due to a price ceiling, and which would not?

Unintended Consequence: ~ Consumers could experience a temporary shortage of hand sanitizer. A binding price ceiling will create a disequilibrium in the market, where the quantity demanded will exceed the quantity supplied. ~ Suppliers could substitute cheaper ingredients, thereby reducing quality. If the price of a good is arbitrarily held below the going rate, then suppliers may be incentivized to lower the quality of their product in order to reduce their input costs and increase their profit. In July 2020, the U.S. Food and Drug Administration (FDA), which regulates the hand-sanitizer market, issued hundreds of sanitizer recalls due to public health concerns. The recalled products were found to include dangerous methanol rather than the safe ethyl alcohol. Not an Unintended Consequence: ~ Consumers could be able to purchase as much of a good as they are willing and able to at a reduced price. When the price is held down during a pandemic, consumers would not be motivated to take only what they need. According to the law of demand, as the price increases, quantity demanded decreases—so without a price increase, why would consumers take less? ~ Suppliers could hire additional workers in order to meet the market demand. Remember that producers will be looking to cut costs in the midst of increasing demand and lower profits. Hiring additional workers, even at a lower wage, would further reduce profit margins. Prices matter to both consumers and suppliers, whether those prices are naturally set by the market or artificially set through price controls. Policymakers must weigh the benefits of price controls with the unintended negative consequences that occur when producers are faced with a constraint they view as a hindrance to making a profit.

What are some of the unintended effects of rent control?

Unintended Effect: ~ Rent control decreases landlords' profits and subsequently lower their incentive to invest in property upkeep. Rent control tends to dissuade landlords from reinvesting in the maintenance of their properties, and subsequently accelerates the degradation of the property. ~ Rent-control laws incentivize the development of upscale housing instead of low-income units. When rent-control laws impede the market from reaching equilibrium, it incentivizes developers to build more expensive housing, which has a higher profit margin. Not an Unintended Effect: ~ More low-income residents are able to find more housing in rent-controlled cities in the long term. The length of tenant occupancies, and the fact that most rent-controlled units are removed from the program when they change tenants, decreases the long-term supply of rent-controlled units. ~ Rent-controlled units have a high ownership turnover rate. The advantages of rent control for the tenant incentivize keeping the rental agreement in the family over generations, which reduces the supply of rent-controlled housing in the long run. An additional unintended consequence is the subsidizing of vacation homes for tenants of rent-controlled apartments. Savings from the lowered rent are used to buy a second or even a third home.

Identify some of the ways businesses will adapt to a minimum wage in the long run.

Way Businesses Will Adapt: ~ move their business to countries not bound by minimum wage law For a large firm, the logistical costs of offshoring may be outweighed by the savings in labor costs. ~ reduce work hours Fewer hours worked on an hourly wage means lower labor costs. ~ use machinery instead of workers Whereas before the minimum wage a human worker might have been cheaper than machinery, with a minimum wage the machinery may be more economical. Not a Way Businesses Will Adapt: ~ offer better customer service to make up for the higher labor costs Employers will often reduce customer service because of the increased cost of the workers who perform it. Due to the increase in the cost of labor created by the minimum wage, employers will inevitably attempt to cut costs to maintain profits. This results in changes to the way labor is utilized within the business, either by cutting hours or cutting labor altogether.

Identify some ways in which, over the long run, workers adjust after a minimum wage law is enacted.

Way Workers Adjust: ~ Some young people decide to work instead of attending school full-time. Higher wages make work a more attractive option. ~ Some retired workers re-enter the labor force. The prospect of higher wages lures some workers out of retirement. Not a Way Workers Adjust: ~ Workers at the bottom of the pay scale move up to better-paying jobs. Minimum-wage workers typically are not readily promotable to higher-paying jobs. ~ Workers leave the labor force due to too-low wages. A minimum wage law does not lower wages; it raises them. The net effect is to increase the pay of those who are working but also to increase the unemployment rate by increasing the quantity of workers seeking jobs.

How are the short-run consequences of price ceilings on bread magnified in the long run?

Way to Magnify Short-Run Consequences: ~ In the long run, bread consumers will choose substitutes to the expensive bread offered in the black market. The demand will become more elastic as people change their eating habits. Consumers are more flexible in the long run, and more of them will seek substitutes for expensive black-market bread. ~ In the long run, these products become increasingly harder to find. Producers will adjust their supply and make less of the unprofitable product. In response, consumers will change their eating habits and turn to substitutes, such as bagels and rolls, which are relatively more plentiful. Not a Way to Magnify Short-Run Consequences: ~ In the long run, bread consumers will demand more of the bread offered in the black market, which will increase the illegal price for the good. Consumers will begin to adapt and choose substitutes for the high-priced bread offered in the black market. In the long run, the black-market price will decrease, although it will still be higher than the price ceiling. ~ In the long run, the price ceiling will no longer exist as the government is forced to abolish it. There are many cases in which the price ceiling remains in place for a long time. This leads both the supply and demand curves to become more elastic. While consumers will initially take advantage of the low price of bread and increase overall quantity demanded, this will lead to an acute shortage of the product that will eventually result in consumers finding bread substitutes.

Gasoline currently sells for about $3 a gallon in the small town of Penfield. In an effort to help out the college students from a nearby university who road trip every year to see the old Greek Revival Chapel, the town is considering passing a law that will make it illegal to sell gasoline for more than 25 cents a gallon. What is the most likely result of such a price control?

a shortage of gasoline A price of 25 cents a gallon would be a binding price ceiling, and the quantity supplied would fall whereas the quantity demanded would increase. This would result in a shortage.

The story of American sugar production illustrates the real-world consequences of price controls. Various price supports have been implemented over the years to maintain _____ of domestic sugar. This has led U.S.-produced sugar to become two to three times _____ than the world price. The result is overproduction and waste as U.S. farmers are _____ to produce more sugar than is needed in regions that are not suited for growing the crop.

high production, more expensive, incentivized Although Coca-Cola has switched to using a sugar alternative in their U.S. product due to high costs, the company continues to make their Latin American product with sugar, as it is much cheaper in those countries.

The government's attempt to _____ additional demand for agricultural products leads to complex and unintended consequences. The government will often _____ surplus agricultural production and sell it at a _____ price to developing countries rather than letting crops go to waste. People in these countries can then purchase the excess output from developed nations rather than goods from _____.

stimulate, purchase, lower, local farmers Although governments attempt to mitigate the negative effects of shortages, their strategies for doing so often result in negative consequences for developing countries. While the international community has attempted to regulate these strategies, developed countries continue on this path.

Select all the price ceilings that would be binding.

~ Click on the black line right under the equilibrium point. ~ Click on the second to bottom black line. ~ Click on the very bottom black line A binding price ceiling forces the price below the natural equilibrium. A nonbinding price ceiling does not actually impact prices. A binding price ceiling changes the market dynamic.

Label the graph so that it illustrates the effect on a market when a nonbinding price floor law is imposed on that market. Multiple labels may belong in the same blank. • QE is the market equilibrium quantity without the price floor. • QS is the actual quantity supplied after the imposition of the price floor. • QD is the quantity demanded after the imposition of the price floor. • PE is the market equilibrium price without the price floor. • PF is the price specified by the nonbinding price floor.

~ Place the box containing "PE" in the first circle on the Y-Axis where the dotted line starts across the equilibrium point ~ Place "PF" in the circle on the Y-Axis where the black line starts ~ Place "QE", "QS", and "QD" on X-Axis beneath the equilibrium point The equilibrium quantity both before and after the nonbinding price floor is the quantity where supply equals demand. Because the price floor is nonbinding, the quantity demanded both before and after the nonbinding price floor is the quantity demanded at the equilibrium market price.