Look At These Prices!

1. ECON 1101 Economics for Non-Majors Look At These Prices! Chapter 5 “If government were a product, selling it would be illegal.” P.J. O’Rourke

2. Tinkering With Markets • In free market systems, prices result from interaction of market forces. • In mixed systems, market forces are not always allowed to operate unhindered. • Some prices are under legal control of government. Ch 5 – Look at These Prices! Minimum prices are set to benefit sellers of goods. Maximum prices are set to benefit buyers of goods.

3. Tinkering With Markets • Are these controls effective? • Do they achieve the intended results? • Do they improve the market, maximize well being? Ch 5 – Look at These Prices!

4. Tinkering With Markets Price Ceilings • Maximum prices allowed by law • Must be below equilibrium to be effective. • Two main purposes: • Keep inflation in check • Keep prices of certain goods and services within reach of lower income people. Ch 5 – Look at These Prices!

5. PC QD QS Tinkering With Markets Price Ceilings P S Ch 5 – Look at These Prices! PE D 0 Q QE

6. PC QD QS Tinkering With Markets Price Ceilings P S Ch 5 – Look at These Prices! PE Maximum price Shortage, QD>QS D 0 Q QE

7. P S PE PC D 0 Q QD QS Price Ceilings: Rent Control • Households choose how many dollars to allocate to housing based on incomes, other expenses. • Some larger cities placed ceilings on rent to ensure availability of affordable housing for lower incomes. • Household mobility - If rents increase, households move to smaller places, get roommates, etc. • Produces market shortage of housing. QE

8. Effects of Rent Control • Housing Shortage • Not all households that want housing at that price can find it. • Housing mobility cannot take place. People don’t leave home, share when they don’t have to, don’t downsize or upsize when they need to. • People live further from employment than they would otherwise. • Costs Not Kept Down for Everyone • “Under table” payments commonly made for available apartments. • “Black Market” • Profit Incentives Removed, Supply Does Not Increase • Other ventures become more profitable than real estate. • Example – Paris – almost no new rental housing built between 1914 and 1950. • Supply decreases in long run as landlords give up and change use of property.

9. Ch 3 – Govt. Price Controls Effects of Rent Control(cont.) • Housing Quality Deteriorates • Lower quality for same price = same quality at higher price. • Landlords cannot afford maintenance. • Resource Misallocation • Households value housing at higher price. • Want MORE resources allocated to housing, not less.

10. Tinkering With Markets Price Floors • Minimum prices allowed by law • Must be above equilibrium to be effective. • Main purpose: • Increase incomes of sellers of the good or service. Ch 5 – Look at These Prices!

11. Tinkering With Markets Price Floors P S Ch 5 – Look at These Prices! PF PE D 0 Q QD QE QS

12. Tinkering With Markets Price Floors P S Ch 5 – Look at These Prices! Surplus, QD<QS PF Minimum price PE D 0 Q QD QE QS

13. This is the market for minimum wage labor. • Demand for labor is a derived demand (Demand is dependent on demand for the product being produced). • Employers will hire up to the point where MC=MB (where wage = contribution to output) • Supply curve represents workers available for jobs at various wages. Price Floors: Minimum Wage P (WAGE) S PF PE D 0 Q QD QE QS

14. Ch 3 – Govt. Price Controls Effects of Minimum Wage (Some win, some lose) • Increased Unemployment in Minimum Wage Jobs • Price floor results in surplus of minimum wage labor. • Qty of labor demanded by employers is less than quantity of labor supplied by workers at higher wages. • When required to pay ALL minimum wage workers a higher per person wage, employers will not be able to employ as many workers. • Workers impacted most – young minority males. • Higher Incomes for Minimum Wage Workers Still Employed • Though more workers are unemployed, those that remain employed earn higher wages. • Does Not Impact Poverty Rates • So few of those working for minimum wage are head of households, it does not tend to pull families out of poverty.