Top Banner
Ceilings and Floors Ceilings and Floors
29

Ceilings and Floors. The Role of Prices Convey information –When Tickle Me Elmos went up in price form about $30 to $300, it told us something about the.

Mar 29, 2015

Download

Documents

Luz Herson
Welcome message from author
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
Page 1: Ceilings and Floors. The Role of Prices Convey information –When Tickle Me Elmos went up in price form about $30 to $300, it told us something about the.

Ceilings and FloorsCeilings and Floors

Page 2: Ceilings and Floors. The Role of Prices Convey information –When Tickle Me Elmos went up in price form about $30 to $300, it told us something about the.

The Role of PricesThe Role of Prices

• Convey information– When “Tickle Me Elmo”s went up in price

form about $30 to $300, it told us something about the popularity of the doll

• Rationing device– The price is what determines who can have the

good

Page 3: Ceilings and Floors. The Role of Prices Convey information –When Tickle Me Elmos went up in price form about $30 to $300, it told us something about the.

Rationing DevicesRationing Devices

• What are other rationing devices?– First Come-First Served– Alphabetical– The government could decide who needs it the

most– Height– Gender– etc.

Page 4: Ceilings and Floors. The Role of Prices Convey information –When Tickle Me Elmos went up in price form about $30 to $300, it told us something about the.

Disequilibrium BehaviorDisequilibrium Behavior

• Is it possible for the price and quantity to NOT be in equilibrium?

• Yes - While the invisible hand may move price towards equilibrium, there are two types of forces that keep the price away from equilibrium

• We will call these “The Invisible Foot” and “The Invisible Handshake” (thanks for David Colander for these names!)

Page 5: Ceilings and Floors. The Role of Prices Convey information –When Tickle Me Elmos went up in price form about $30 to $300, it told us something about the.

The Invisible FootThe Invisible Foot

• This is government interference with prices in the market.

• The government does this quite often. For instance you may notice that at UDF they advertise that they sell milk and beer at “state minimum prices” meaning that the state will not allow prices on milk and beer to be below a set amount.

Page 6: Ceilings and Floors. The Role of Prices Convey information –When Tickle Me Elmos went up in price form about $30 to $300, it told us something about the.

Price ControlsPrice Controls

There are two types of price controls - Price Ceilings and Price Floors

Page 7: Ceilings and Floors. The Role of Prices Convey information –When Tickle Me Elmos went up in price form about $30 to $300, it told us something about the.

Price CeilingsPrice Ceilings

• Price Ceiling - sets a maximum price that is allowed by law.

• Result of Price Ceiling:– Stay at a permanent shortage situation

• Note that a price ceiling can be any price the government chooses. It is, however only effective if it is below the equilibrium price

Page 8: Ceilings and Floors. The Role of Prices Convey information –When Tickle Me Elmos went up in price form about $30 to $300, it told us something about the.

Price CeilingPrice Ceiling

• Example of Price Ceiling• Rent controlled apartments

• In New York City, San Francisco, Boston, and other cities the city or state determines the maximum amount that can be charged for rent on many apartments.

• A maximum price is a price ceiling

Page 9: Ceilings and Floors. The Role of Prices Convey information –When Tickle Me Elmos went up in price form about $30 to $300, it told us something about the.

Rent Controlled ApartmentsRent Controlled Apartments

Page 10: Ceilings and Floors. The Role of Prices Convey information –When Tickle Me Elmos went up in price form about $30 to $300, it told us something about the.

Rent Controlled ApartmentsRent Controlled Apartments

P

Q0

Page 11: Ceilings and Floors. The Role of Prices Convey information –When Tickle Me Elmos went up in price form about $30 to $300, it told us something about the.

Rent Controlled ApartmentsRent Controlled Apartments

P

Q

S

0

Page 12: Ceilings and Floors. The Role of Prices Convey information –When Tickle Me Elmos went up in price form about $30 to $300, it told us something about the.

Rent Controlled ApartmentsRent Controlled Apartments

P

Q

S

D

0

Page 13: Ceilings and Floors. The Role of Prices Convey information –When Tickle Me Elmos went up in price form about $30 to $300, it told us something about the.

Rent Controlled ApartmentsRent Controlled Apartments

P

Q

S

D

P*

Q*0

Page 14: Ceilings and Floors. The Role of Prices Convey information –When Tickle Me Elmos went up in price form about $30 to $300, it told us something about the.

Rent Controlled ApartmentsRent Controlled Apartments

P

Q

S

D

P*

Q*0

Pceiling

Qs QdAmount of Shortage

Page 15: Ceilings and Floors. The Role of Prices Convey information –When Tickle Me Elmos went up in price form about $30 to $300, it told us something about the.

Winners and LosersWinners and Losers

Who gains and loses with price ceilings:

• 1. Benefit - those who get rent controlled apartments

• 2. Loses - those who can’t find apartments due to the shortage.

• 3. Loses - landlords who must accept lower rent.

Page 16: Ceilings and Floors. The Role of Prices Convey information –When Tickle Me Elmos went up in price form about $30 to $300, it told us something about the.

Price FloorsPrice Floors

• Price Floor - sets a minimum price that is allowed by law.

• Result of Price Floor• Stay at a permanent surplus situation

• Note that a price floor can be set at any price, but is only effective if it is above the equilibrium price

Page 17: Ceilings and Floors. The Role of Prices Convey information –When Tickle Me Elmos went up in price form about $30 to $300, it told us something about the.

Price FloorsPrice Floors

• Example of Price Floor• Minimum Wage Legislation

• The minimum wage is a lowest price the government will allow firms to pay for labor.

• A minimum price is a price floor

Page 18: Ceilings and Floors. The Role of Prices Convey information –When Tickle Me Elmos went up in price form about $30 to $300, it told us something about the.

Price FloorsPrice Floors

• When we look at the labor market it is similar to other supply and demand diagrams except for the labels.• L - quantity of workers• w - wages (the price we pay workers)

• It is also different because the suppliers of labor are households, not firms and the demanders of labor are firms, not households

Page 19: Ceilings and Floors. The Role of Prices Convey information –When Tickle Me Elmos went up in price form about $30 to $300, it told us something about the.

Winners and LosersWinners and Losers

Who gains and loses with price floors:

• 1. Benefit - those who get higher wages

• 2. Loses - those who can’t find jobs at the higher wage

• 3. Loses - firms who must pay higher wages.

Page 20: Ceilings and Floors. The Role of Prices Convey information –When Tickle Me Elmos went up in price form about $30 to $300, it told us something about the.

Minimum Wage LegislationMinimum Wage Legislation

Page 21: Ceilings and Floors. The Role of Prices Convey information –When Tickle Me Elmos went up in price form about $30 to $300, it told us something about the.

Minimum Wage LegislationMinimum Wage Legislation

Wage

# of Workers0

Page 22: Ceilings and Floors. The Role of Prices Convey information –When Tickle Me Elmos went up in price form about $30 to $300, it told us something about the.

Minimum Wage LegislationMinimum Wage Legislation

Wage

# of Workers

S

0

Page 23: Ceilings and Floors. The Role of Prices Convey information –When Tickle Me Elmos went up in price form about $30 to $300, it told us something about the.

Minimum Wage LegislationMinimum Wage Legislation

Wage

# of Workers

S

D

0

Page 24: Ceilings and Floors. The Role of Prices Convey information –When Tickle Me Elmos went up in price form about $30 to $300, it told us something about the.

Minimum Wage LegislationMinimum Wage Legislation

Wage

# of Workers

S

D

w*

L*0

Page 25: Ceilings and Floors. The Role of Prices Convey information –When Tickle Me Elmos went up in price form about $30 to $300, it told us something about the.

Minimum Wage LegislationMinimum Wage Legislation

Wage

# of Workers

S

D

w*

L*0

wfloor

Ld Ls

Amount of Unemployed Workers

Page 26: Ceilings and Floors. The Role of Prices Convey information –When Tickle Me Elmos went up in price form about $30 to $300, it told us something about the.

Invisible HandshakeInvisible Handshake

• The Invisible Handshake is social pressure that often prevents price from reaching equilibrium

• For instance, let’s think about what happened recently when Bruce Springsting played Music Hall downtown.

• Tickets sold out in hours and there many people who wanted to get tickets than were able to buy them from Ticketmaster

Page 27: Ceilings and Floors. The Role of Prices Convey information –When Tickle Me Elmos went up in price form about $30 to $300, it told us something about the.

Invisible HandshakeInvisible Handshake

• What does that say about the price of the tickets?

• Were the tickets priced below or above equilibrium price?– Below, since there was a shortage

• So why weren’t prices at the equilibrium price?– Bruce didn’t want alienate fans– It is not considered “right” to charge so much

Page 28: Ceilings and Floors. The Role of Prices Convey information –When Tickle Me Elmos went up in price form about $30 to $300, it told us something about the.

Invisible HandshakeInvisible Handshake

• Another example of the Invisible Handshake is with transplant organs

• There are not enough organs for all the people who need them

• This means the price of an organ is below the equilibrium

• Why don’t hospitals and doctors raise the price to equilibrium?

Page 29: Ceilings and Floors. The Role of Prices Convey information –When Tickle Me Elmos went up in price form about $30 to $300, it told us something about the.

Rationing DevicesRationing Devices

• When a market it out of equilibrium, price is not always working as a rationing device. Think about what might be the rationing device for our examples– Tickets to the concert– Rent controlled apartments– Transplant Organs