Chapter 5

Increase in Demand and Supply

Price uncertain, quantity increased

Price Ceiling

-A government-imposed limit on how high a price can be charged -Generally lower than the equilibrium price -Leads to excess demand -With price ceilings, existing goods are no longer rationed entirely by price (other methods of rationing existing goods arise--nonprice rationing)

Rent Control

-A price ceiling on rents, set by government -Implemented with good intentions--to cope with sudden increases in demand for housing that would otherwise cause rents to explode and force many poor people out of their apartments

Excise Tax

-A tax that is levied on a specific good -Ex: luxury tax on expensive cars (imposed by US in 1991) -Reduce the quantity of goods demanded -Shifts the supply curve up (to the left) by the amount of the tax

Quantity Restrictions

-Government sometimes interferes with the market by requiring licenses, which limit entry into the market (doctor, vet, financial planner, cosmetologist, to fish) -Means that any increases in demand lead only to price increases -Decrease supply, raising the price and reducing the quantity

Price Floors

-Government-imposed limits on how low a price can be charged -Generally above the existing price -When there is an effective price floor, quantity supplied exceeds quantity demanded, and the result is excess supply

Minimum Wage

-Laws specifying the lowest wage a firm can legally pay an employee -Example of a price floor -The market-determined equilibrium wage for most full-time adult workers is generally above the minimum wage -Effects: (1) Helps Q2 workers who are able to find work but hurts those who cannot find work at the minimum wage and who would have accepted and been hired at the equilibrium wage (2) Hurts firms by increasing the cost of production and consumers because the increased production cost is reflected in the higher price of products

Third-Party Payer Markets

-The person who receives the good differs from the person paying for the good -Under this system, the person who choose how much to purchase doesn't pay the entire cost -In third-party payer markets, equilibrium quantity and total spending are much higher -In a third-party payer system, total spending is much higher than total spending if the consumer paid -Quantity demanded is higher with a third-party payer system than it otherwise would be -Market forces won't hold down costs as much as they would otherwise because the person using the service doesn't have an incentive to hold down costs -Doesn't mean that there are no pressures--third-party payers (parents, employers, government) will respond to this by trying to limit both the quantity of the good individuals consume and the amount they pay for it -Ex: US health care system

Living Wage

A wage necessary to support a family at or above the federally determined poverty line

Tariff

An excise tax on an imported good

Decrease in Demand and Increase in Supply

Decrease in Price, quantity uncertain

Increase in Demand and Decrease in Supply

Increase in Price, quantity uncertain

Decrease in Demand and Supply

Price uncertain, decreased quantity

Why are rent controls likely to worsen an existing shortage of housing?

Rent controls are price ceilings and result in shortages in rental housing. As time passes and as the population rises, the demand for rental housing rises. On the supply side, other ventures become more lucrative relative to renting out housing. Owners have less incentive to repair existing buildings, let alone build new ones, reducing the supply of rental housing over time. As a result, the shortage becomes more acute over time

Future of Price Ceilings

Since politicians tend to focus on the short run, we can expect rent control to continue to be used when demand for housing suddenly increases

Nonprice Rationing

The method of rationing scarce resources by ways other than price