Post on 03-Jan-2016
Artificial Barriers
Unit 6.3
Artificial Barriers
– Your book looks at different scenarios at which there is an artificial barrier that prevents the market from getting to an equilibrium point.
– These barriers can either fix the prices higher (Price Floor) or lower than the equilibrium point (Price Ceiling).
Price ceiling
– A barrier that keeps the price lower than the equilibrium point is called a price ceiling, as prices are not allowed to go higher than the price ceiling.
– An example of a price ceiling is rent control.
The Market for Gasoline with a Price Ceiling(a) The Price Ceiling on Gasoline Is Not Binding
Quantity ofGasoline
0
Price ofGasoline
1. Initially,the priceceilingis notbinding . . . Price ceiling
Demand
Supply, S1
P1
Q1
The Market for Gasoline with a Price Ceiling(b) The Price Ceiling on Gasoline Is Binding
Quantity ofGasoline
0
Price ofGasoline
Demand
S1
S2
Price ceiling
QS
4. . . . resultingin ashortage.
3. . . . the priceceiling becomesbinding . . .
2. . . . but whensupply falls . . .
P2
QD
P1
Q1
Rent Control in the Short Run and in the Long Run
(a) Rent Control in the Short Run(supply and demand are inelastic)
Quantity ofApartments
0
Supply
Controlled rent
RentalPrice of
Apartment
Demand
Shortage
Rent Control in the Short Run and in the Long Run
(b) Rent Control in the Long Run(supply and demand are elastic)
0
RentalPrice of
Apartment
Quantity ofApartments
Demand
Supply
Controlled rent
Shortage
Price floor– A barrier that keeps a price higher than the
equilibrium point is called a price floor. In other words, the price cannot go lower than the price floor.
– One example of a price floor is the minimum wage.
A Market with a Price Floor(a) A Price Floor That Is Not Binding
Quantity ofIce-Cream
Cones
0
Price ofIce-Cream
Cone
Equilibriumquantity
2
Pricefloor
Equilibriumprice
Demand
Supply
$3
100
The government says that ice-cream cones must sell for at least $2; this legislation is ineffective at the current market price.
A Market with a Price Floor(b) A Price Floor That Is Binding
Quantity ofIce-Cream
Cones
0
Price ofIce-Cream
Cone
Demand
Supply
$4Pricefloor
80
Quantitydemanded
120
Quantitysupplied
Equilibriumprice
Surplus
3
How the Minimum Wage Affects the Labor Market
Quantity ofLabor
Wage
0
LaborSupplyLabor surplus
(unemployment)
Labordemand
Minimumwage
Quantitydemanded
Quantitysupplied
Minimum Wage Ideology
• These are contentious issues, where many businesses and economists claim that having a minimum wage destroys jobs and depresses the economy.
• Others feel that these claims are not entirely true, and that having a minimum wage improves the quality of life for low wage workers and can stimulate the economy.
Rationing
• Rationing is when the government limits the amount of a commodity that you can buy. This can be done by first come, first served, by lottery, or by coupon (as it was done in WWII).
• This can create incentives for people to go around the rationing and create a Black Market.