MICROECONOMICS FINAL STUDY GUIDE Chapter 4 Disequilibrium the condition that exists in a market when the plans of buyers do not match those of sellers a temporary mismatch between quantity supplied and quantity demanded as the market seeks equilibrium Price floor a minimum legal price below which a product cannot be sold To achieve higher prices the government sets a price floor or a minimum selling price that is above the equilibrium price To have an impact a price floor must be set above the equilibrium price A price set above the equilibrium price results in a surplus A price floor set at or below the equilibrium price has no effect What is a price floor In what industries might a price floor be used A minimum legal price below which a product cannot be sold to have an impact a price floor must be set above the equilibrium price Industry agricultural products farmers receiving more labor market Draw an example of a price floor Show and explain the consequences of a Government imposed minimum wage Imposing a minimum wage will allow employed workers to gain more than the equilibrium wage However it will increase unemployment as the businesses will hire less employees since the wage expense will increase Also people who were previously not looking for jobs will now analyze their opportunity cost and give up their leisure time to look for jobs as they could now receive a larger salary Hence quantity of work supplied will shift to qS and quantity of workers demanded by business will decrease to qD How do supply and demand elasticity effect price ceiling and price floors Demand then government intervention with price floor wage will not impact unemployment as much Supply the price will increase a lot and quantity not a lot Price ceiling a maximum legal price above which a product cannot be sold To have an impact a price ceiling must be set below the equilibrium price Sometimes public officials try to keep a price below the equilibrium level by setting a price ceiling A price ceiling set below the equilibrium price results in a shortage A price ceiling set above the equilibrium price has no effect What is a price ceiling In what industries might a price ceiling be used A maximum legal price above which a product cannot be sold to have an impact a price ceiling must be set below the equilibrium price Industries Housing education Draw an example of a price ceiling 3 Rent in cities along the coastline was rising very fast and very high due to the influx of people moving to the cities after World War II and people who d been living there were being forced to move out if they could not pay the higher rent Show graphically and explain the government s use of a price ceiling in the case of rent control What would be some of the consequences of this government set price ceiling In the example of housing after World War II did a price ceiling solve the immediate problem What were some other consequences of the price ceiling in the above example It solved the problem in the short term because Quantity Supplied increase D1shift to D2 more demand Government put price celling below equilibrium Demand at that price increase because more people are able to pay at that specific price In the Long run it decreases in quantity and quality secondary charges in additional fees to compensate the loss for land owners Chapter 15 beginning Market power the ability for a firm to raise its price without losing all its customers to rival firms Must have the demand curve downward sloping By failing to expand output to the point where marginal benefit equals marginal cost firms with market power produce less of the good than would be socially the best 3 kinds of government policies are designed to alter or control firm behavior 1 Social regulation 2 Economic regulation a Government regulations aimed at improving health and safety b Ex health care reform a Aims to control the price output the entry of new firms and the quality of service in industries in which monopoly appears inevitable or even desirable b Ex local electricity transmission c Local phone service d Subway system 3 Antitrust policy a Aimed at preventing monopoly and fostering competition in markets where competition is desirable Natural Monopoly Long run average cost curve that slopes downward over the range of market demand Usually faces huge initial capital costs Once capital is in place average cost falls as output increases so the average cost curve slopes downward over a broad range of output In this case average cost is lowest when a single firm supplies the market Unregulated monopolist chooses profit maximization by producing where marginal revenue marginal cost o But the problem with letting the monopolist maximize profit is that the resulting price output is inefficient in terms of social welfare o Inefficient because price marginal benefit exceed marginal cost o The marginal value of additional output exceeds its marginal cost so social welfare would increase if output expands Government can increase social welfare by forcing the monopolist to lower its price and expand output To this the government must regulate the monopoly or operate the monopoly o Public utilities government owned or government regulated monopolies Now if the government regulators decides to lower the price where price marginal benefit marginal cost consumers would rather this price since it s a lower price But the monopolist would lose money they would experience a loss because the average cost curve is higher than the price And in order to keep going they would require a subsidy to keep going Instead of a subsidy some regulators try to establish a price that provides the monopolist with a fair return Setting the price average cost provides a normal or fair profit for the monopolist o Results in a normal profit o Enhances social welfare compared to unregulated situation In order to stay in business the monopolist has to accept the normal profit Chapter 16 beginning Private goods have 2 important features 1 Rival in consumption Public goods Non rival in consumption o Available to all in equal amount Nonexclusive a Amount consumed by one person is unavailable for others to consume 2 Exclusive a Suppliers can easily exclude those who don t pay o Suppliers cannot easily deny to those who don t pay Firms who seek profit cant profitably sell public goods o In this case of market failure the government comes to the rescue by providing public goods and paying for them