The San Francisco Housing Market in 1906

1

• Markets in Action
• Effect of Price Controls
• - Rent Ceiling
• - Minimum Wage
• Effect of a Sales Tax
• Analysis of Markets for Illegal Goods
• Analysis of Farm Revenue Stabilization

2
Effect of Price Controls Attempt to set a Price
Ceiling below the equilibrium price
Attempt to set a Price Floor above the
equilibrium price
3
The San Francisco Housing Market in 1906
24
SS
Rent (dollars per unit per month)
20
After Earthquake
Long run Adjustment
16
D
12
0 44 72 100 150
Quantity (thousands of units per month)
4
A Rent Ceiling
SSa
24
Rent (dollars per unit per month)
20
16
D
12
0 44 72 100 150
Quantity (thousands of units per month)
5
Inefficiency of Rent Ceilings
30
S
24
Rent (dollars per unit per month)
20
Rent ceiling
16
D
12
0 44 72 100 150
Quantity (thousands of units per month)
6
A Market for Low-Skilled Labor
SS
6
Wage Rate (dollars per hour)
LS
5
After invention
Long-run adjustment
4
D
3
20 21 22 23
Quantity (millions of hours per year)
7
Minimum Wage and Unemployment
SS
6
Wage Rate (dollars per hour)
5
4
3
DA
20 21 22 23
Quantity (millions of hours per year)
8
Effect of a Sales Tax Incidence Who pays the
tax? - Elasticity important in determining who
pays Why? Because a measure of
alternatives More elastic ? pay less (other
things equal) Efficiency The Deadweight Loss
of a tax - Some of lost Consumer Producer
Surplus is not captured in tax revenue
9
The Sales Tax
S
110
Price (dollars per player)
105
100
95
DA
3 4 5 6
Quantity (thousands of CD players per week)
10
Sales Tax and the Elasticity of Demand
S tax
S
Price (dollars per dose)
2.20
Perfectly inelastic demand
2.00
D
100
Quantity (thousands of doses per day)
11
Sales Tax and the Elasticity of Demand
S
Price (cents per pen)
1.00
Perfectly elastic demand
0.90
1 4
Quantity (thousands of marker pens per week)
12
Sales Tax and theElasticity of Supply
S
Perfectly inelastic supply
Price (dollars per bottle)
50
45
D
100
Quantity (thousands of bottles per week)
13
Sales Tax and theElasticity of Supply
Perfectly Elastic Supply
Price (cents per pound)
11
10
S
D
3 5
Quantity (thousands of pounds per week)
14
Examples with perfectly elastic supply or
demand Tax the pizza at only one
restaurant Tax the purchases of cheese by pizza
makers Others? Examples with perfectly inelastic
supply or demand Tax the purchases of
insulin Tax on (unimproved) property Others?
15
Taxes and Efficiency

• Due to the difference in price paid by the buyer
  and received by the seller the marginal benefit
  does not equal the marginal cost. Thus a
  deadweight loss exists and quantity is below the
  equilibrium quantity.
• The more inelastic demand or supply, the smaller
  the deadweight loss and the smaller the decrease
  in quantity.

16
Taxes and Efficiency
130
S tax
S
Price (dollars per player)
105
100
95
75
D
D
0 1 2 3 4 5 6 7 8 9
10
Quantity (thousands of CD players per week)
17
The Market for an Illegal Good If selling is
illegal, then cost of getting caught selling
will reduce supply If possessing is illegal,
then cost of getting caught possessing will
reduce demand
18
A Market for an Illegal Good
Cost per unit of breaking the law...
Price
to buyer
to seller
S
Pc
c
D
Qc
Q p
Quantity
19

• Analyzing Farm Revenue Stabilization
• Elasticity
• Inventories
• Government Policy

20
Harvest, Farm Prices,and Farm Revenues
MS0
MS1
8
Poor harvest
Price (dollar per bushel)
6
4
2
D
0 5 10 15 20 25
Quantity (billions of bushels per year)
21
Harvest, Farm Prices,and Farm Revenues
MS2
MS0
8
Price (dollar per bushel)
6
Bumper Harvest
4
2
D
0 5 10 15 20 25
Quantity (billions of bushels per year)
22
How Inventories Limit Price Changes
Inventory Speculation
8
Price (dollar per bushel)
6
S
4
Production decreases
Production increases
2
D
Quantity (billions of bushels)
0 5 10 15 20 25
Inventory