Introduction to Economics Tutorial 5 PDF

INTRODUCTION TO Economics (ECON101) Tutorial 5  Government Intervention ✘ A situation were government intervene in the market activities. Why Do Governments Intervene in the Market? ✘ Offering Public Services (e.g. Electricity, Water, Sewage, Public Transportation, etc....

INTRODUCTION TO Economics (ECON101) Tutorial 5  Government Intervention ✘ A situation were government intervene in the market activities. Why Do Governments Intervene in the Market? ✘ Offering Public Services (e.g. Electricity, Water, Sewage, Public Transportation, etc.) ✘ Correcting Market Failures and inefficiencies (e.g. Drugs, Monopoly, etc.) Types of Government Interventions 1- Price Controls  Price Ceiling (Max. Price)  Price Floor (Min. Price) 2- Taxes General Note: government interventions can sometimes create price distortions, thus harming consumers and producers instead 2 of helping them out.  1) Price Controls Price Ceiling: Price Floor: A legal MAXIMUM on the price at which a A legal MINIMUM on the price at which a good can be sold. good can be sold. E.g. Bread, Old Rent E.g. Minimum Wage P S P S Pf P* P* Pc D D Qs Q* Qd Q Qd Q* Qs Q QsQd Shortage in Supply Surplus in Supply Tutorial Sheet 5  1. Which of the indicated prices are binding price ceiling and which are not? Question 1a 2. What is the effect of the binding price ceiling(s)? Price ceiling is the maximum legal price, thus to be binding it should be below equilibrium thus 12 & 14 are not binding (not effective). P=8 is the only binding price ceiling, since it is less than the equilibrium price. ----------------------------------------------------------- The effect is that more consumers will be able to purchase more products (Qd increases), while there is less incentive for suppliers to produce due to decrease in prices. At P=8 : Qd=60 > Qs=40. shortage = 20 units. 5  1. Which of the indicated prices are binding price Floors and which are not? Question 1B 2. What is the effect of the binding price floor(s)? Price floor is the minimum legal price, thus to be binding it should be above equilibrium thus P=8 is non-binding (non-effective). P=12 & P=14 are both binding (effective) Price floors, since both are higher than the equilibrium price. ------------------------------------------------------- Effect: producers will increase production and less consumers will be able to buy. P=12: Qd=40