Download How Does Government Intervention Affect Markets?

• 1. What does it mean if an item has inelastic
demand?
• 2. Which way does the demand line slope with
inelastic demand?
• 3. What does it mean if an item has elastic
demand?
• 4. Which way does the demand line slope with
elastic demand?
11/9 Do Now
How Does Government
Intervention Affect Markets?
• Sometimes, governments intervene in the
market to influence prices.
• They do this by placing limits on how high or
low certain prices may be.
• These limits are called price controls:
government-imposed limits on the prices
that producers may charge in the market.
Price Controls
• (You don’t have to write this slide)
• The temptation to impose price controls is, as the
economist Henry Hazlitt reminds us, nothing new.:
“The record of price controls goes as far back as human
history. They were imposed by the Pharaohs of ancient
Egypt. They were decreed by Hammurabi, king of Babylon,
in the eighteenth century B.C. They were tried in ancient
Athens.”
• —Henry Hazlitt
Why Governments Intervene in Markets
• In modern economies, governments usually
impose price controls when they are persuaded
that supply and demand will result in prices that
are unfairly high for consumers or unfairly low for
producers
• Examples: Rationing in WW2, Oil shortages in the
1970s, farm subsidies, oil subsidies, rent control,
& minimum wage
Why Governments Intervene in Markets
• When a government wants to keep prices from going too
low to protect producers who feel the market isn’t
adequately providing income, it sets a price floor: a
minimum price set by the government to prevent
prices from going too low
Price Floors Lead to Excess Supply
• The minimum wage is another price floor. The
minimum wage: the lowest hourly rate, or wage,
that employers can legally pay their employees
Effects of Minimum Wage
• With a partner and a computer, research to
find 3 pieces of evidence (not the same
as pros and cons of raising minimum
wage) for and against raising minimum
wage.
• After analyzing the evidence, develop an
opinion on minimum wage
Assignment!
• When a government wants to keep prices from
going too high, it sets a price ceiling. A price
ceiling: a maximum price set by the government
to prevent prices from going too high
Price Ceilings Lead to Excess Demand
• Governments impose price ceilings to enable
consumers to buy essential goods or services
they wouldn’t be able to afford at the
equilibrium price.
• Price ceilings are usually established in
response to a crisis, such as war, natural
disaster, or widespread crop failure
Price Ceilings Lead to Excess Demand
• Is minimum wage a price floor or price
ceiling?
• Does a price floor lead to excess supply or
excess demand?
11/10 DO NOW
• The best-known form of price ceilings in
the United States today is rent control.
Rent control: a legal limit on the amount
a landlord can charge a tenant; a price
ceiling on rents
Price Ceilings Lead to Excess Demand
Price Ceilings Lead to Excess Demand
• Price controls lead to surpluses and
shortages because they prevent markets
from reaching a market-clearing price.
• The excess supply and demand that arise
must be addressed outside the market, which
leads to black markets and rationing
Dealing w/ Excess Supply & Demand: Rationing & Black Markets
• When shortages occur, the government may impose
rationing. Rationing: the controlled distribution of a
limited supply of a good or service.
• Shortages can also give rise to black markets: an illegal
market in which goods are traded at prices or in
quantities higher than those set by law.
Dealing w/ Excess Supply & Demand: Rationing & Black Markets
• At this point you might be wondering
why, if price controls are so harmful
to markets, the government doesn’t
just get rid of them.
• The answer to this question has more
to do with politics than economics.
Why Ending Price Controls Is Difficult
• The political pressure on elected officials to
intervene in the market when prices rise and
fall rapidly can be intense. And although price
controls are inefficient, many people believe
that they further the goal of economic equity
• Some people—farmers, people who live in
rent-controlled apartments, workers who earn
minimum wage, benefit from it
Why Ending Price Controls Is Difficult
• Choose an example of a price floor imposed a government in
the past or present or choose an example of rationing or a
good sold in the black market.
• Research the 3 positive and 3 negative effects of that policy
or in the case of the black market good, 3 reasons why that
good had to be sold in the black market.
• Then, form an opinion on whether or not you think that
policy was a positive or negative for society
• Some examples of price floors and ceilings imposed by
government:
• Price Ceilings: Rent Control in NYC, State Farm Insurance
in Florida, Usury Laws, Gas price controls in the 1970s
Assignment!