2 Supply, Demand, and Government Policies In a unregulated market system with open entry and exit, market forces establish equilibrium prices and quantities.While equilibrium conditions may be efficient, not everyone will be satisfied with the outcomes.ConsumersProducers
3 Price Controls…Are usually enacted when policymakers believe the market price is unfair to buyers or sellers.Result in government-created price ceilings or price floors.
4 Price Ceiling and Price Floor A legally established maximum price at which a good can be sold.Price FloorA legally established minimum price at which a good can be sold.
5 Price CeilingTwo outcomes are possible when the government imposes a price ceiling: The price ceiling is not binding if set above the equilibrium price. The price ceiling is binding if set below the equilibrium price, leading to a shortage.
6 Price Ceiling that is NOT Binding Price ofOranges-lbSupply4Priceceiling$3EquilibriumpriceDemand100Quantity ofOranges lbs
7 Price Ceiling that IS Binding Price ofOranges-lbSupplyEquilibriumprice$32Priceceiling75Quantitysupplied125QuantitydemandedShortageDemandQuantity ofOranges-lbs
8 Effects of Price Ceiling A binding price ceiling creates…shortages because QD > QSGasoline shortage of the 1970snonprice rationingLong linesDiscrimination by sellers
9 Rationing Resources Price Rationing Non-price Rationing Efficient ImpersonalNon-price RationingLong linesWaste buyers time InefficientDiscrimination by sellers:Goods may not go to buyer who value it most highly InefficientPotentially unfair
10 Lines at the Gas PumpIn 1973, OPEC raised the price of crude oil in world markets. Because crude oil is the major input used to make gasoline, the higher oil prices reduced the supply of gasoline.What was responsible for the long gas lines?Economists blame government regulations that limited the price oil companies could charge for gasoline.
11 Initially … Price of Gasoline Demand Supply 1. The price ceiling is notbinding . . .Price ceilingP1Q1Quantity ofGasoline
13 Rent ControlRent controls are ceilings placed on the rents that landlords may charge tenantsGoal: to help the poor by making housing more affordableNew York City rent controls were enacted as a WWII emergency measureSome units still under rent control todayMany rich tenants in rich neighborhoods paying low WWII prices.2
14 Rent Control in the Long Run... Rental Price ofApartmentSupplyControlled rentShortageDemandQuantity ofApartments710