Kinh tế học - Chapter 5: Policy analysis with supply and demand

Chapter 5Policy Analysis With Supply and Demand McGraw-Hill/IrwinCopyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved.1Learning ObjectivesWhat is a price floor?What is the effect of minimum wage on the market?What is a price ceiling?What is rent control?What is economics of a draft vs. voluntary enlistment?What is economics of market for human organs?What is economics of healthcare?What is economics of parking meters?What is economics of agricultural subsidies?5-22Price FloorPrice floor= minimum legal price set by government.It affects only when set above the equilibrium price.Effective price floor creates surplus.Price FloorSupplyDemandPriceQuantity supplied after the price floor is imposed. Quantity demanded after the price floor is imposed.Quantity786040$12$8Surplus5-33Minimum Wage and Market for Unskilled LaborMinimum wage = price floor in labor market.Minimum wage law increases wages of unskilled workers with jobs.However it also creates surplus labor, which equals unemployment.It may cause firms to raise product prices.Minimum wageSupplyDemandWages per hourNumber of unskilled workers20,00013,0008,000$6$4Unemployment5-44Elasticity of Demand and Minimum WageNumber of workers employed with no minimum wageNumber of workers employed with minimum wage and inelastic demand curveNumber of workers employed with minimum wage and an elastic demand curve.Number of WorkersWage RateSupply of unskilled laborAn inelastic demand for unskilled laborMinimum WageAn elastic demand for unskilled labor9,80010,0002,000Inelastic demand= demand for labor is not price sensitive.Elastic demand= demand for labor is very price sensitive.The more elastic demand for labor, the more jobs eliminated by minimum wage law.5-55Minimum WageMinimum wages increase wages of workers with jobs.Surplus of labor created by minimum wage can result in worse working conditions.Minimum wages impose the greatest cost on those with the least skills.Minimum wages increases demand for skilled workers and hence their wages.Minimum wage law creates incentives for black market and illegal workers.5-66Price CeilingPrice ceiling = maximum legal price set by government.It affects only when set below the equilibrium price.Effective price ceiling creates shortage.Price ceilingSupplyDemandPriceQuantity supplied after the price ceiling is imposed. Quantity demanded after the price ceiling is imposed.Quantity716050$6$8Shortage5-77Rent ControlRent control = price ceiling in market for apartments.Rent control creates shortage of apartments, specially in the long run.The greater the price elasticity of demand, the greater the shortage.Rent controlSupply of apartmentsDemand for apartmentsMonthly RentQuantity13,0007,100$600$900Shortage5-88Rent ControlLandlords and potential tenants who can’t find apartments lose.Existing apartment holders can gain.It creates incentives for individuals to take up more housing space than they otherwise would.It reduces individuals’ mobility.It reduces quality of apartment buildings.It creates incentives for black market and illegal activities.5-99Draft vs. Voluntary EnlistmentWith voluntary enlistment, the government has to pay market wages to get its desired number of soldiers.With a draft, the government can pay whatever wages it wants. Soldiers lose with lower wages.A draft forces transfer of wealth from soldiers to civilians not subject to the draft.5-1010Market for Human OrgansIn the U.S., market for human organs is illegal.So, legal price of human organs = $0.It creates shortage.Free markets correct shortages by raising prices.The ban promotes barter exchange, other illegal activities and black market in organ transfers.15,000Supply of KidneysDemand for Kidneys$ Price of kidneysSize of shortage if price is zero.Quantity of kidneys5-1111Should Government Pay for Health Care?Free health care benefits create shortages for services with very price-elastic demand.Governments offering free healthcare limit costs by rationing services.Price controls over necessities create incentives for producers to develop luxury goods instead of necessities. The point on the supply curve where quantity = 110,000If price = $0 consumers will be here on their demand curveAn elastic demand for MRIsSupply of MRIsPrice$2,000$1,000Number of scans 110,00050,0005-1212Parking MetersParking meter = government set parking price.Below equilibrium price creates shortage and deadweight loss of waiting on weekdays.Higher price eliminates shortage by reducing quantity demanded.Above equilibrium price creates surplus on weekends.800Demand for spaces on a weekendQuantityPriceSupply of parking spacesDemand for spaces on a weekdayGovernment set parking price1,9001,0005-1313Agricultural SubsidiesGovernment supported price for agricultural produce is higher than equilibrium price.The greater the price elasticities of demand and supply, the higher cost of agricultural support price.Artificial agricultural prices lead to wastage of resources. Government can reduce supply by paying farmers not to grow crops.Demand for wheatSupply of wheatNumber of bushels in millions302014$4$3Price per bushelSurplus5-1414Do You Know?When does a price floor have no effect on a market? Price floor will not be effective if it is set below the market equilibrium price.Why can the minimum wage law and rent control create black markets? The minimum wage law and rent control prevent markets from reaching equilibrium. Since it can not legally reach equilibrium, markets develop unofficial ways to do so.5-1515Do You Know?How does the elasticity of demand for health care affect the cost to a government that provide free health care to all of its citizens? When a government offers it free, the price of health care is zero for its citizens. If the demand for health care is elastic, quantity demanded increases by manifolds. Hence, the government has to bear the higher costs. 5-1616Summary Price floor = minimum legal price. Price floor creates surplus.Price ceiling = maximum legal price. Price ceiling creates shortage.Government distorts efficient functioning of market by artificially controlling prices such as minimum wage law, rent control, military draft, ban on market for human organs, parking meters and agricultural subsidies.5-1717Coming Up How is wealth created and destroyed?5-1818