Economics 2010Economics 2010

Lecture 10

Markets in Action

Markets in ActionMarkets in Action

Two examples:Housing markets and rent ceilingsLabor markets and minimum wages

Housing Markets and Rent CeilingsHousing Markets and Rent Ceilings

How does an unregulated housing market work?

To answer this question, let's see how such a market copes with a massive supply shock

Housing Markets and Rent CeilingsHousing Markets and Rent Ceilings

San Francisco, 1906: a massive earthquake destroyed more than half the housing. Virtually no one died.

How did San Francisco cope with such a devastating reduction in the supply of housing?

Housing Markets and Housing Markets and Rent CeilingsRent Ceilings

Short-run adjustment: a rise in price and a decrease in the quantity demanded

Housing Markets and Rent CeilingsHousing Markets and Rent Ceilings

Long-run adjustment: an increase in supply

Price fallsQuantity

demanded increases

Housing Markets and Rent CeilingsHousing Markets and Rent Ceilings

Rent ceilingsSearch activity (we had so far ignored

this in ECON 2010)“Black” markets

Housing Markets and Rent CeilingsHousing Markets and Rent Ceilings

Rent ceiling is $16 a unit

ShortageSearch

activityBlack market

Housing Markets and Rent CeilingsHousing Markets and Rent Ceilings

for the 44th unit:

Opportunity cost = $16, but MWTP =$24

(quite a waste!) For demanders, the

opportunity cost of a house includes the search time and effort spent looking for a house.

For the 44th house, this cost could add significantly to the $16 of the rent

Housing Markets and Rent CeilingsHousing Markets and Rent Ceilings

Rent ceilings are supposed to allow poor people to access the market

but they many times keep rich established people at low rents while poor newcomers simply cannot find a house

shortages are not solved by the price mechanism but by some less efficient one. Race, sex, your connections, etc. will help more than your money

Next: minimum wages

A minimum wage often usedWhat is a minimum wage?How does a minimum wage affect the

labor market?

Labor markets and minimum wagesLabor markets and minimum wages

Wage is fixed above equilibrium wage

Quantity demanded decreases

Labor markets and minimum wagesLabor markets and minimum wages

Quantity supplied increases

Unemployment arises

No mechanism for ending unemployment

Labor markets and minimum wagesLabor markets and minimum wages

Why do we have minimum wages?

NEXTNEXT

Markets and Efficiency

Read Ch. 5