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Economics 2010

Economics 2010. Lecture 10 Markets in Action. Markets in Action. Two examples: Housing markets and rent ceilings Labor markets and minimum wages. Housing Markets and Rent Ceilings. How does an unregulated housing market work?

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Economics 2010

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  1. Economics 2010 Lecture 10 Markets in Action

  2. Markets in Action Two examples: • Housing markets and rent ceilings • Labor markets and minimum wages

  3. Housing 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

  4. Housing 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?

  5. Housing Markets and Rent Ceilings

  6. Housing Markets and Rent Ceilings • Short-run adjustment: a rise in price and a decrease in the quantity demanded

  7. Housing Markets and Rent Ceilings • Long-run adjustment: an increase in supply • Price falls • Quantity demanded increases

  8. Housing Markets and Rent Ceilings • Rent ceilings • Search activity (we had so far ignored this in ECON 2010) • “Black” markets

  9. Housing Markets and Rent Ceilings • Rent ceiling is $16 a unit • Shortage • Search activity • Black market

  10. Housing 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

  11. 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

  12. Next: minimum wages

  13. Labor markets and minimum wages • A minimum wage often used • What is a minimum wage? • How does a minimum wage affect the labor market?

  14. Labor markets and minimum wages • Wage is fixed above equilibrium wage • Quantity demanded decreases

  15. Labor markets and minimum wages • Quantity supplied increases • Unemployment arises • No mechanism for ending unemployment

  16. Why do we have minimum wages?

  17. NEXT • Markets and Efficiency • Read Ch. 5

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