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.