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PRICE CONTROLS / SURPLUS

WHY GOVERNMENTS POSE PRICE CONTROLS
1. 2. 3. 4. To help poor For rent subsidies Wage subsidies Due to unfair market income

TWO TYPES OF PRICE CONTROLS
1. 2. Price ceiling – maximum price a good can be sold Price floor – minimum price a good can be sold

PRICE CEILING (EX, RENT CONTROL) TWO TYPES OF PRICE CEILING
1. 2. Below equilibrium price – Binding (there is an effect on free market equilibrium)this causes a shortage in the market Above the equilibrium - Non binding (No practical affect)

EFFECTS OF A PRICE CEILING
1. 2. 3. 4. Drop in supply – suppliers can’t supply at the same price Increase in demand – because of the drop of the price This crate a shortage Could create black markets

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PRICE FLOOR (EX, MINIMUM WAGES)

TWO TYPES OF PRICE FLOORS
1. 2. Below the equilibrium price – no practical affect Above the equilibrium price – has an affect

EFFECTS OF THE PRICE FLOOR ABOVE EQUILIBRIUM PRICE
(in this case price of a good is higher than the equilibrium price) 1. 2. 3. Decrease in quantity demanded (consumes have to pay more) Increase in quantity supplied (suppliers receive more money) Result SURPLAS

RENT CONTROL AFFECTS OF THE RENT CONTROL IN THE SHORT RUN
   Supply and demand of houses are relatively inelastic Small initial shortage Reduced rents

EFFECTS OF THE RENT CONTROL IN THE LONG RUN
      Not apartments being built Failing to maintain properly People find their own apartments Induce more people to move in to cities Large shortage of housing Governments pose price

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Initially supply of houses if inelastic

-In the long run houses become elastic and numbers drop - As result of the low rents, demand increases simultaneously

EFFECTS OF MINIMUM WAGES
      Unemployment – (demand for labour decreases) Higher income for workers who have jobs Lower income for workers who do not have jobs Highly skilled labour market is not affected Teen age labour market is affected Some decide to drop out of school due to higher wages but subsequently become unemployed

TAXES Taxes on sellers of a good 1. Buyers and sellers share the burden of tax 2. Buyers pay more 3. Sellers receive less TAXES OF BUYERS OF A GOOD 1. 2. 3. 4. Initial impact on the demand Lower equilibrium price Lower equilibrium quantity Reduces the size of the market.

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WHAT IS TAX INCIDENCE?

Tax obligations between buyer and sellers
WHO PAY THE TAX

1. Elastic supply, Inelastic demand = Buyer pay most of the tax 2. Inelastic supply, elastic demand = Seller pay most of the tax

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WELFARE ECONOMY

Study of how allocation of resources affects economic wellbeing

SURPLUS

Consumer Surplus = Willingness to Pay Price – Actual Price Producer surplus = amount that a producer receive – amount they are willing to accept Market surplus = sum of all consumer surpluses

Marginal buyers : Willingness to pay is equal to market price

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MEASURING CONSUMER SURPLUS

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CALCULATING CONSUMER SURPLUS

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