Micro Chapter 7
Search Activity
The time spent looking for someone with whom to do business with. -increases = when a price ceiling creates a shortage (ex: housing shortage) -is costly, it uses time and other resources(such as phones, cars, gas, etc.) that could have been used in other productive ways -Rent ceiling controls the rent portion of the cost of housing but not the search cost. So when the search cost is added to the rent, some people end up paying a higher opportunity cost for housing than they would have if there were no rent ceiling
Rent Ceiling(extended notes)
(Efficiency) -In a housing market with no rent ceiling, market forces determine the equilibrium rent. Basically, the quantity of housing demanded equals the quantity of housing supplied. (in this situation, scarce housing is allocated efficiently because the marginal cost of housing equals the marginal benefit) -In this efficient market, total surplus--the sum of consumer and producer surplus--is maximized at the equilibrium rent and quantity of housing shows that with a rent ceiling, the outcome is inefficient. Marginal benefit exceeds marginal cost. Producer surplus and consumer surplus shrink, and a deadweight loss arises This loss is borne by the people who can't find housing by landlords who can't offer housing at a lower rent ceiling. -But when the total loss exceeds the deadweight loss. Resources get used in costly search activity or in evading the law in the black market. The value of these resources might be large. There is yet a further loss: the cost of enforcing the rent ceiling law. This loss, which is borne by taxpayers. -Although a rent ceiling creates inefficiency, not everyone loses. The people who pay the rent ceiling get an increase in consumer surplus, and landlords who charge a black market rent get an increase in producer surplus. -When rent is below the market equilibrium rent, landlords have no incentive to maintain their buildings. So over time, both the quality and quantity of housing supplied decrease and the loss arising from a rent ceiling increases. -The size of the loss from a rent ceiling depends on the elasticities of supply and demand. If supply is inelastic, a rent ceiling brings a small decrease in the quantity of housing supplied. And if demand is inelastic, rent ceilings bring a small increase in the quantity of housing demanded. (So the more inelastic the supply or demand, the smaller is the shortage of housing and the smaller is the deadweight loss.) -(basically, rent ceilings can prevent scarce resources from being allocated efficiently--resources do not flow to their highest-valued use) (Fairness) -Rent controls violate the fair rules view of fairness because they block voluntary exchange. -Blocking rent adjustments that bring the quantity of housing demanded into equality with the quantity supplied doesn't end scarcity. So when the law prevents the rent from adjusting and blocks the price mechanism from allocating scarce housing, some other allocation mechanism must be used. If that mechanism were one that provided the housing to the poorest, then the allocation might be regarded as fair. -But the mechanisms that get used do not usually achieve such an outcome. First-come, first served is one allocation mechanism. Discrimination based on race, ethnicity, or sex is another. Discrimination against young newcomers and in favor of old established families is yet another. None of these mechanisms delivers a fair outcome. -Example: Rent ceiling in NYC provide examples of these mechanisms at work. The main beneficiaries of rent ceilings in NYC are families that have lived in the city for a long time--including some rich and famous ones. These families enjoy low rents while newcomers pay high rents for hard-to-find apartments. (If RC's are so bad, why do we have them?) -The economic case against rent ceiling is now widely accepted, so new rent ceiling laws are rare. -When gov'ts try to repeal rent control laws, current renters lobby politicians to maintain the ceilings. Also, people who are prevented from finding housing would be happy if they got lucky and managed to find a rent-controlled apartment.(this is why there is plenty of political support for rent ceilings) -Because more people support rent ceilings than oppose them, politicians are sometimes willing to support them too.
Minimum Wage(extended notes)
(Efficiency) -The demand for labor tells us about the marginal benefit of labor to the firms that hire it. Firms benefit because the labor they hire produces the goods and services that they sell. -Firms are willing to pay a wage rate equal to the benefit they receive from an additional hour of labor. -The marginal benefit minus the wage rate is a surplus for the firms. -The supply of labor tells us about the marginal cost of working. To work, people must give up leisure or working in the home, activities that they value. The wage rate received minus the marginal cost of working is a surplus for workers. -An efficient allocation of labor occurs when the marginal benefit to firms equals the marginal cost borne by workers. Such an allocation occurs in the labor market. Firms enjoy a surplus, and workers enjoy a surplus. The sum of these surpluses is maximized. -The loss from a minimum wage = Marginal benefit exceeds marginal cost. The firms' surplus and workers' surplus shrink, and a deadweight loss arises. The loss falls on the firms that cut back employment and the people who can't find jobs at the higher rate. -But the total loss exceeds the deadweight loss. Resources get used in costly job-search activity as each unemployed person keeps looking for a job(writing letters, making phone calls, going to interviews, etc.) The value of these resources might be large. (Fairness) -Minimum wage is unfair on both views of fairness: It delivers an unfair result and imposes unfair rules. -The result is unfair because only those people who find jobs benefit. The unemployed end up worse off than they would be with no minimum wage. And those who get jobs were probably not the least well off. -Personal characteristics, which means discrimination, allocates jobs and is another source of unfairness. -The minimum wage imposes unfair rules because it blocks voluntary exchange. Firms are willing to hire more labor and people are willing to work more, but they are not permitted by the minimum wage to do so. (If MWs are so bad, why do we have it?) -Although the minimum wage is inefficient, not everyone loses from it. The people who find jobs at the minimum wage rate are better off. Other supporters of the minimum wage believe that the elasticities of demand and supply in the labor market are low, so not much unemployment results. -Labor unions support the minimum wage because it puts upward pressure on all wage rates, including those of union workers. Nonunion labor is a substitute of union labor, so when the minimum wage rises, the demands for union labor increases.
Minimum Wage Law
A gov't regulation that makes hiring labor services for less than a specified wage illegal. -So, firms are free to pay a wage rate that exceeds the minimum wage rate but may not pay less than the minimum. -A minimum wage is an example of a price floor. -The aim of the minimum wage is to boost the incomes of low-wage earners. So, in the markets for the lowest-paid workers, the minimum wage will exceed the equilibrium wage.
Price Floor
A gov't regulation that places a lower limit on the price at which a particular good, service, or factor of production may be traded. -trading at a lower price is illegal -price floors are used in many markets, but the one that is the largest is the labor market(the price of labor is the wage rate that people earn) -Supply and demand of labor determine the wage rate and the quantity of labor employed.
Price Ceiling/Price Cap
A gov't regulation that places an upper limit on the price at which a particular good, service, or factor of production may be traded(trading at a higher price is illegal.) -A price ceiling has been used in several markets, but the one that is the largest in everyone's budget is the housing market(the price of housing is the rent that people pay for a house/apartment.) Demand and supply in the housing market determines the rent and the quantity of housing available.
Subsidy
A payment by the gov't to a producer to cover part of the cost of production.
Price Support
A price floor in an agriculture market maintained by a gov't guarantee to buy any surplus output at that price.
Rent Ceiling
A regulation that makes it illegal to charge more than a specified rent for housing. -The rent ceiling attempts to prevent the rent from rising high enough to regulate the quantities demanded and supplied. -The law and the market are in conflict, and one(or both) of them must yield.
Black Market
An illegal market that operates alongside a gov't-regulated market. -A rent ceiling sometimes creates a black market in housing as frustrated renters and landlords try to find ways of raising the rent above the legally imposed ceiling. (Landlords want higher rents because they know that renters are willing to pay more for the existing quantity of housing. Renters are willing to pay more to jump in front of the line.)
Increased Job-Search Activity
Finding a good job takes a great deal of time and other resources. With a minimum wage, more people are looking for jobs than the number of jobs available. -Frustrated unemployed people spend time and other resources searching for hard-to-find jobs.
Price Support(extended notes)
Free Market Reference Point: -The market is efficient only if the price in the rest of the world is the equilibrium price. If the price in the rest of the world is less than the equilibrium price, it is efficient for the domestic farmers to produce less and for some of the produce/product to be imported at a lower price(lower opportunity cost) available in the rest of the world. But if the price in the rest of the world exceeds the equilibrium price, it is efficient for domestic farmers to increase production and export some produce/product. Price support and Subsidy -To make the price support work, the gov't agrees to pay farmers the set support price for every ton of (produce/)product they produce and can't sell in the market. -If farmers produce the quantity of goods at say 30 million tons a year, production increases to that amount. -If domestic users of the product cut back their purchases and farmers produce the quantity of goods at say 20 million tons a year, production decrease to that amount and -Because farmers produce a greater quantity than domestic users are willing to buy, something must be done with the surplus. If the farmers just dumped the surplus on the market, the price would fall to that at which consumers are willing to pay for the quantity produced. To make the price support work, the gov't buys the surplus. -The price support increases the farmers' total revenue. Without a subsidy, farmers would receive a total revenue of say $625 million($25 a ton multiplied by 25 million tons.). With a subsidy, they receive a total revenue of say $1,050 million($35 a ton multiplied by 30 million tons.) -The price support is inefficient because it creates a deadweight loss. Farmers gain but consumers' who are also the taxpayers who end up paying the subsidy, lose. And consumers' losses exceed the farmers' gains by the amount of the deadweight loss. Effects on the Rest of the World The rest of the world receives a double-whammy from price supports: - First, import restrictions in advanced economies deny developing economies access to the food markets of the advanced economies. The result is lower prices and smaller farm production in the developing economies. -Second, the surplus produced in the advanced economies gets sold in the rest of the world. Both the price and the quantity produced in the rest of the world are depressed even further. -The subsidies received by U.S. farmers are paid not only by U.S. taxpayers and consumers but also by poor farmers in developing countries.
Price Support in Agriculture
How Gov'ts Intervene in Markets for Farm Products: 1) Isolate the Domestic Market: A gov't can't regulate a market without first isolating the domestic market from global competition. If the cost of production in the rest of the world is lower than that in the domestic economy and if foreign producers are free to sell in the domestic market, the forces of demand and supply drive the price down and swamp any efforts by the gov't to influence the price. To isolate the domestic market, the gov't restricts imports from the rest of the world. 2) Introduce a Price Floor: A price floor in an agricultural market is called a price support. A price support in an agricultural market also generates a surplus. At the support price, the quantity supplied exceeds the quantity demanded. What happens to the surplus makes the effects of a price support different from those of a minimum wage. The gov't buys the surplus. (similarly, a price floor in a labor market--a minimum wage--creates a surplus of labor aka unemployment) 3) Pay Farmers a Subsidy: When the gov't buys the surplus produced by farmers, it provides them with a subsidy. Without the subsidy, farmers could not cover their costs because they would not be able to sell the surplus.
Illegal Hiring
With more people looking for work than the number of jobs available, some firms and workers might agree to do business at an illegal wage rate below the minimum wage in a black market. (an illegal wage rate might be at any level between the minimum wage rate an hour and the lowest wage rate at which someone is willing to work an hour.)
Opportunity Cost
of a good is equal to its price plus the value of the search time finding the good (ex: opportunity cost for housing = the rent plus the value of the search time spent looking for an apartment)
