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Government Intervention: When Uncle Sam steps in to flex some muscles in the marketplace.

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Presentation on theme: "Government Intervention: When Uncle Sam steps in to flex some muscles in the marketplace."— Presentation transcript:

1 Government Intervention: When Uncle Sam steps in to flex some muscles in the marketplace.

2 Markets tend to move towards Equilibrium naturally, but there are two occasions where the government might step in and change things: -Price Ceilings -Price Floors

3 Definition: A maximum price that can legally be charged for a good or service. -The government places prices on goods that are considered essential and might become too expensive for some consumers. -Ex. Rent Control in New York City -This was introduced in the 1940s to help prevent inflation. -Today, is used to help poor households by cutting their costs and permitting them to live where they otherwise could not. -This reduces the quantity and quality of housing.

4 $1,500 $1,200 $900 $600 $300 $0 PRICE QUANTITY # of Apartments (in thousands) DEMANDSUPPLY In this market, the equilibrium is shown where supply meets demand. That means that rent would equal $900 and 30,000 apartments would be both supplied and demanded. But, what would happen if the city passed a law that limited the rent of apartments?

5 $1,500 $1,200 $900 $600 $300 $0 PRICE QUANTITY # of Apartments (in thousands) DEMANDSUPPLY At $600, the Quantity of apartments Demanded would equal 40,000, but the Quantity Supplied would be 20,000. We would have excess demand or what is known as a shortage of 20,000 apartments. This is known as a price ceiling because prices cannot rise above it. SHORTAGE This happens because at such a low price, apartments seem inexpensive and many more people will try to rent. However, landlords will have difficulty earning profits at this price, thus fewer new buildings will be built and older ones will be converted into more profitable venues like offices, stores, etc. PRICE CEILING

6 Are Price Ceilings Good?? - Well, if there are only 20,000 apartments and there are 40,000 people, decisions must be made about who should get the houses. - Methods for this usually include long waiting lists, discrimination by landlords, and even bribery is used by people to get what they want. - Even luck plays a huge role, sometimes people get a rent- controlled apartment through inheritance from family. - Rent-controlled apartments cause landlords to cut costs because they are trying to make up their lost profit. Thus, why should a landlord apply a new coat of paint or plant a garden if they cant earn the money back. - Plus, if there a waiting lists, what incentive is there to work hard to attract people? - As a result, many rent-controlled apartment buildings become run-down and renters sometimes have to wait months for routine problems to be fixed.

7 Definition: A minimum price, set by the government, that must be paid for a good or service. -One well known Price Floor is minimum wage, which sets a minimum price that an employer can pay a worker for an hour of labor. -The Federal Government sets a base level of wages, but states can actually set theirs higher if they wish (not lower though) -FYI: A full-time worker being paid the Federal minimum wage will earn less than the Government says is necessary to support a couple with one child. -What happens if a Price Floor is set above the Equilibrium Price Level?

8 $5.15 $4.50 $0 PRICE OF LABOR LABOR (millions of workers Demand for Workers Supply of Labor In a regular market, the Price of Labor would be set at $4.50 and firms would hire 4 million workers. Now, what would happen if we impose a minimum wage above the Equilibrium level?

9 $5.15 $4.50 $0 PRICE OF LABOR LABOR (millions of workers Demand for Workers Supply of Labor Now with a minimum wage (Price Floor) at $5.15, the Supply of Labor is at 6 Million Workers and the Demand for Workers is only 2 Million. We have what is known as a surplus of workers. It is called a price floor because the price cannot fall below it. SURPLUS So now, all our workers are being paid more, but was it worth the pay increase to lose all those jobs?


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