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MAE101 ECONOMIC PRINCIPLES

ASSIGNMENT 1

Name: THUYEN QUE NGO


Student ID: NGOQD1201
Unit: MAE101 ECONOMIC PRINICPLES
Lecturer: SUE CHUA
ASSIGNMENT 1
Due date: FRIDAY MAY 11 2012 5:00PM

TABLE OF CONTENTS

Question 1..........................................................................................................3
Question 2..........................................................................................................3
Question 3..........................................................................................................4
Question 4..........................................................................................................5
Question 5..........................................................................................................6
Question 6..........................................................................................................6
Question 7..........................................................................................................7
References.........................................................................................................8

Question 1
Answer:
Price ceiling is a maximum legal price that can be charged for goods and
services. The most popular example of a price ceiling is rent control. In 1943,
a high level of inflation rate increased the cost of rent in New York, Los
Angeles and many cities in United States. Most of low-income tenants could
not afford renting. Government imposes price ceiling to eliminate inflation and
to help the poor by making housing more affordable. Some of the rent control
acts were introduced, such as Federal Housing and Rent Act 1947, and
New York Emergency Housing Act 1950 (Gyourko, J & Linneman, P 1900).
Moreover, rent control acts were also introduced in some states throughout
India, such as Delhi (The Delhi Rent Control Act 1958), Assam (Assam Urban
Areas Rent Control Act 1966) and Bihar (The Bihar Building Control Act 1977)
(Dev, S & Dey, P 2006). The Acts creates fair rents and helps the poor to
afford housing. In 1978, Italian government imposes rent controls to prevent
inflation in country and to help the homelessness and the poor access the
rights to housing.
Question 2
Answer:

S1

Price
CS1

P1
PS1

D1
Q1

Quantity

Panel a

From panel a, the market for rental accommodation before introduction of rent
controls, the equilibrium price is at P1 and equilibrium quantity is at Q1. As the
result, consumer surplus is the blue area CS1 and producer surplus is the red
area PS1. There is no shortage involved.
After the introduction of a price ceiling (panel b), the quantity supplied reduces
from Q1 to Qs, quantity demanded increases from Q 1 to QD and market price
falls from P1 to P2. The consumer surplus and producer surplus also change.
3

The consumer surplus is the two blue areas CS1 and CS2 (gain CS2), while the
producer surplus has reduced to the small red area PS 3 (lose CS2). There is a
shortage involved.
Price
S1
CS1

P1
P2

Price ceiling

CS2
PS3

Shortage

D1
Qs

Q1

QD

Quantity (rent per unit)

Panel b

Question 3
Answer:
The market equilibrium quantity and equilibrium price before the introduction
of price ceiling is at point A. When government imposes a price ceiling on
rental accommodation; landlords have to charge the tenants below market
equilibrium price (P1 to P2). Since the lease payment is low, landlords are
disincentive to repair and maintain the rent property. This lacking of proper
maintenance is unpleasant tenants. As a result, a black market may exist
when there is a negotiation between landlords and tenants, in which tenants
would gain a better service if they are willing to pay extra money.
In black market, landlord will gain the benefits as they could earn more money
from some tenants who are willing to pay much more for rent property.
However, tenants could lose their money as landlord could charge them a
black market price from point C up to point B.

Price

P3

Maximum black
market price (B)

A
P1
C

Price ceiling

P2

Shortage

0
Q1

Qs

QD

Quantity

Question 4
Answer:
Introduction of rent controls causes the permanent shortage of rent dwellings,
reduces the incentive for landlords to repair and improve the quality of the
existing buildings, and imposes unfairness between long-time renters and
new renters.
On supply side:
The panel a) demonstrates market without price ceiling; equilibrium quantity is
at Q1 and equilibrium price is at P1. The panel b) shows price ceiling is
introduced. As the price controls restrict the highest price that landlords could
charge on renters, landlords could not earn as much revenue as possible.
Due to this, they are not willing to build new flats and fail to maintain the
existing ones. Gradually, landlords lose their investment. The supply of rental
accommodation will be decreased (S 1 to S2); market will ended with shortage
of housing in short run (panel b).
Price

Price

S2

S1

S1
P2
P1

P1

Price ceiling

D1
Q1
Panel a
On demand side:

Quantity

Shortage

Qs

Q2 Q1 QD
111 111

D1
Quantity

Panel b

As landlords fail to meet the maintenance, current tenants face the problem of
run-down and poor quality housing. Current tenants who want to increase the
quality have to pay extra money for landlords.
In panel b), many new tenants response to low rents by seeking for more and
more cheap flats (D1 to D2) while current tenants would not move out. As the
supply remains low and could not satisfy the high of demand, (S 1 to S2), there
are even more and more new tenants still could not able to find new flats. The
market will end with a permanent shortage in long run (shortage

>

long run

shortage short run).


Price

Price

S2
S1

S1
P3
P2
P1

P1

Price ceiling

D1
0

Shortage

D1

D2

Q1

Quantity

Qs

Q 2 Q1 Q 3

Panel a

QD

Quantity

Panel b

Question 5
Answer:
To achieve the equity, government imposes a none-price rationing such as
queuing, which is known as a first come, first served solution (Taylor, B 2006
& Riley, G 2006). It ensures all chances are equally distributed among buyers.
Since price is not a factor, people with the highest willingness to pay in term of
time rather than in term of money will get what they want.
To achieve administrative efficiency, government may impose a subsidy on
consumers or producers. A subsidy on producers would increase quantity
supplied and lower price; while, a subsidy on consumers would increase
quantity demanded and increases price.

Question 6
Answer:
There are some options opened for landlord to choose their renters. To avoid
the tardy payments, landlords will consider on renters credit background and
income. They may target the middle to high income renters with permanent
residences rather than those are unstable employment. To keep the house in
good conditions, landlords may avoid young applicants who have pets. Some
landlords may prefer renters who are young attractive ladies or generous
gentlemen. Others renting decisions may be based on religions, customs and
belief.
Question 7
Answer:
To give solutions to price ceiling, government may either subsidies producers
(panel a) or consumers (panel b). In panel a), suppose government supports
landlords a subsidy per rent unit (X), landlords will receive a total of P 2 + X,
which is price paid by tenants plus a subsidy by government. This encourages
landlords to supply more (S 1 to S2), but at a lower price. Hence, a new
equilibrium quantity expands from Q 1 to Q2, while a new equilibrium price falls
from P1 to P2.
S1

Price

S2 (with subsidy)

P2 + X

P2

P1

S1

P1

P2

P2 + X
D1

D1

Q1

Q2

Quantity

Q1

D2 (with
subsidy)

Q2

Panel a

Panel b

A subsidy on landlords increases the


quantity supplied (Q1 to Q2) and lower
rental payments (P1 to P2)

A subsidy on tenants increases the


quantity demanded (Q1 to Q2) and rental
payments (P1 to P2)

Government subsidies landlords would give an advantage of increasing in


supply but lower rental payments. There are much more apartments available
for lease from landlords with a lower price. More tenants are now able to
afford housing and shortage can be solved.
7

References
Block, W, Horton, J & Shorter, E 1998, Rent control: An economic
abomination, International Journal of Value-Based Management, vol.11,
pp.253-263, retrieved by 29 April 2012, < http://www.walterblock.com/wpcontent/uploads/publications/rent_control_abomination.pdf>
Dev, S & Dey, P 2006, Rent control laws in India: A critical analysis, retrieved
by 28 April 2012, <http://www.scribd.com/d_scorpion/d/22817191/4-TheLegal-Aspects-of-Rent-Control>
Gans, J, King, S, Stonecash R, & Mankiw, N 2009, Principles of
Economics,4th edn, Cengage Learning Australia, Vic.
Gyourko, J & Linneman, P 1900, Rent controls and rental housing quality: A
note on the effects of New York citys old controls, Journal of Urban
Economics, vol.27, pp.398-409, retrieved by 29 April 2012 <
http://www.socsci.uci.edu/~jkbrueck/course%20readings/gyourko%20and
%20linneman.pdf>
Marks, D 1984, The effects of rent control on the price of rental housing,
Land Econom, vol.60, pp.81-94.
Taylor, B 2006, Price ceilings, Fundamental Finance, retrieved by 28 April
2012, < http://economics.fundamentalfinance.com/price-ceiling.php>
Riley, G 2006, AS market failure: Maximum prices, retrieved 29 April 2012, <
http://tutor2u.net/economics/revision-notes/as-marketfailure-maximumprices.html>
Riley, G 2006, AS market failure: Maximum prices, retrieved 30 April 2012, <
http://tutor2u.net/economics/revision-notes/as-marketfailure-producersubsidies.html>