Macro Book Notes Chapter 4 89 94 98 116 119 120 WORKING WITH SUPPLY AND DEMAND I government intervention in markets A price ceiling a government imposed maximum price in the market 1 a price ceiling lower than the equilibrium price shortage a decreases quantity supplied b increases quantity demanded 2 short side of the market the smaller of quantity supplied and quantity demanded at a particular price a when quantity supplied and quantity demanded differ the short side of the market will prevail limiting factor 3 shortage an excess demand not eliminated by a rise in price so that quantity demanded continues to exceed quantity supplied 4 a price ceiling creates a shortage and increases the time and trouble required to buy the good while the price decreases the opportunity cost may rise 5 black market a market in which goods are sold illegally at a price above the legal ceiling rent controls government imposed maximum rents on apartments and homes 6 B price oors a government imposed minimum price in a market 1 usually used to raise prices or prevent prices from falling in agricultural markets 2 a price oor higher than the equilibrium price surplus a decreases quantity demanded b increases quantity supplied 3 surplus an excess supply not eliminated by a fall in price so that quantity supplied continues to exceed quantity demanded 4 maintaining a price oor a in order to maintain the price oor the government must prevent the surplus from driving down the market price 1 usually by buying the surplus at a guaranteed price 2 also by paying farmers to not grow crops C subsidy a government payment to buyers or sellers on each unity purchased or sold opposite of a tax 1 shifts the demand curve upward by the amount of the subsidy a if paid to sellers shifts supply curve downward by amount of subsidy 2 sometimes given to students to help pay for college 3 bene ts both sides of the market buyers pay less and sellers receive more per unit 4 distribution of bene ts form a subsidy is the same regardless of whether the subsidy is paid to buyers or sellers II supply and demand in housing markets A housing markets are dominated by previously owned homes B stock variable a variable representing a quantity at a moment in time i e 15 gallons C ow variable a variable representing a process that takes place over some time period i e 2 gallons per minute D supply curve for housing vertical line showing the total number of homes in a market that are available for ownership 1 as you move along the line quantity doesn t change but the line itself shifts as new homes are built E demand curve for housing a curve showing at each price the total number of homes that everyone in the market would like to own given their constraints 1 home ownership costs aka constraints a both current and prospective homeowner face an interest cost of ownership this cost rises when current home prices rise and falls when current home prices fall 2 housing market equilibrium when the price at which the quantity of homes demanded and the quantity supplied housing stock are equal a when the housing stock grows at the same rate as housing demand prices remain unchanged as demand prices rise b when restriction on new building prevent the housing stock from growing as fast c when demand for housing begins rising faster than it has in the past the housing stock lags behind and prices rise III the housing boom and bust 1997 2011 the crisis of 2008 A highly increased demand 1 economic growth 2 low interest rates 3 adjustable rate mortgages 4 securitization of mortgages 5 6 speculation wanted to invest in homes because value was increasing lower lending standards B sudden drop in demand 1 oil and gas prices increased harder to pay mortgage 2 3 interest rates in adjustable rate mortgages increased reverse speculation