U2 M8 Price Floors + Black Market

Price Floor

• sets a minimum price on a good

• If set above the market clearing level, a prolonged surplus

Why Price Floors

• Protect the income levels of certain industries, like farming

• “guarantee” employees a minimum wage

• To prevent shortages

Minimum Wage Floor

• Raising the minimum wage will lead to a decrease in demand from companies and supply of labor from people →leads to unemployment because supply exceeds demand

• Minimum wages are raised → increased expenses for an employer that amount to lots over time. Employers take less profits incentivizing them to raise the prices on their goods leading to them losing customers due to price increases.

3 Common Price Ceilings and Floors

• Rent Control

  • A system in which local governments tell building owners how much they can charge their tenants

  • provide a disincentive for people to move out of rent controlled apartments

    • Even though the idea is to give low-income housing, the truth is that someone who is financially alright becomes rich and then doesn’t move out from the cheap rent controlled apartments

  • creates a shortage of apartments

• Farming Price Supports

• Minimum Wage

Determining Prices for Black Market

When there is a black market, supply is set as a constant. This is what exists and suppliers will try to get the maximum price for it.

Max Price is determined as follows:

• Draw the initial equilibrium condition

• Draw the vertical supply line at the quantity supplied. You will notice that it is to the left of the equilibrium line Look at where the vertical supply line crosses the demand curve. This is the maximum black market price