Have you any questions on the previous lesson, homework, or materials listed on
the previous daily class outline?
2.
Course Objectives
List course the first three course objectives from the text page 127:
1.
2.
3.
3.
Outline
I. Housing
Markets and Rent Ceilings
A. The 1906 earthquake in San Francisco
left 200,000 people homeless, but the housing shortage was eliminated within a month. The market
response to the earthquake was as follows:
1. As illustrated in Figure 7.1, in the short-run the earthquake shifted the short-run
supply curve of housing leftward. Thus the rent rose from $16 per month before the
earthquake to $20 per month after the quake while the quantity of housing fell from
100,000 to 74,000. (These are the same prices and quantities used in the text.) However,
there was no shortage of housing as the higher price motivated suppliers to rent more
space and encouraged demanders to rent smaller spaces.
2. In the long run the supply of housing is perfectly elastic. Hence in the long-run
the equilibrium quantity of housing and the rental rate of housing returned to their
initial levels of 100,000 and $16 per month.
B. A regulated housing market operates much differently from a free one.
Regulation usually consists of imposing a rent ceiling, which is an example of a price
ceiling. Rent ceilings are laws that prohibit charging rent higher than some maximum
amount.
1. If the rent ceiling is below the equilibrium price, the quantity demanded exceeds
the quantity supplied. In this case, the quantity actually bought and sold equals the
quantity supplied.
2. When the quantity demanded exceeds the quantity supplied, potential buyers search
for suppliers with goods available for sale. Search is costly to buyers. Therefore the
total opportunity cost of housing equals the rent plus the opportunity cost of the search
activity.
3. In addition to search, excess demand creates black markets, or illegal
trading arrangements wherein buyers and sellers transact at prices above the legal
maximum.
4. Rent ceilings create inefficiency and a deadweight loss, as illustrated in Figure
7.2.
5. New York City has had rent ceilings since World War II. These rent ceilings have
caused the abandonment of blocks of apartments.
II. The Labor Market and the Minimum Wage
A. Decreases in the demand for unskilled
labor constantly occur because of technological advances.
B. In an unregulated labor market, a decrease in the demand for unskilled labor
causes a short-run decline in wages (as the demand curve shifts leftward along a
positively sloped short-run supply curve of labor), and in the long run no change in wages
(if the long-run supply of labor is perfectly elastic).
C. A labor market may be regulated with a minimum wage law, that is, a
lowest legal wage that can be paid. In this case, a decrease in demand cannot cause a
lower wage, so the quantity supplied of unskilled help exceeds the quantity demanded and
unemployment results.
1. Some economists (David Card and Alan Krueger) recently suggested that minimum wage
laws do not cause unemployment. However, other economists disagree and most believe that
higher minimum wage laws cause more unemployment.
A. Insert your CD-rom in your computer.
Double-click MyComputer and select your CD-rom drive. Then do Step B.
B. Before you can use Economics
in Action for the first time, you must double-click on
the setup icon opening one of two folders having icons that look likeTVs with blue
screens and click/run the setup.exe file within that folder. (Ignore the blue
screen TV which also has the Microsoft Internet Explorer icon associated with it.) Then go
on to Step C.
C. When you accomplish Step B., your execute
software file will prompt you to restart your computer so that the new settings and the
EIA 5.0 icon can hereafter be seen. From here on your efforts to open the Economics
in Action 5.0 CD-rom can be accomplished by inserting your EIA 3.0 CD-rom in its drive,
followed by following by selecting and clicking your mouse on the sequence listed in Step
D.
D. Click Start;
Select Programs;
Locate and select the EIA 5.0 program;
When your mouse identifies the EIA 5.0 program a sub-menu opens;
click the red EIA 5.0 icon.
This brings you to the opening screen within Economics in Action 5.0
E. To become acquainted with EIA 5.0, click on
Using EIA.
F. When you are comfortable with Using EIA,
click on any of the tutorial headings shown on EIA 5.0's opening screen.
G. The first tutorial of major importance for this
course is called Markets in Action located at the lower left side of the opening screen.
The Markets in Action section was created especially for
this chapter. Go ahead and complete the Markets in Action section on your own.
H. If you are having difficulty installing or
getting your Economics in Action 5.0 to work, contact the technical assistant for this
course:
Mark Nelson / Lester Library Learning Resource Center 2nd
Floor
Patrick Henry Community College
P.O. Box 5311
Martinsville, VA 24115
(540) 656-0275
phnelsm@ph.cc.va.us
6. Let's begin Questions and Problems (study guide pages 101 - 106))
The important true or false, multiple
choice, and problems are those associated with the first three course objectives in
which you seek to understand the economics of:
Housing Markets and Rent Ceilings;
The Labor Market and the Minimum Wage;
Taxes.
7. Homework
1. Review Key Concepts pages
97- 99 in your study guide.
2. Complete the odd-numbered Questions from your study
guide pages 100 - 106 and check your answers using pages 107 - 112.
3. Compare your class notes and your understanding of the homework Questions with your study partner.
8. Complete the Summary of Key Points (using text page 146)
Housing Markets and Rent
Ceilings
1. A decrease in the supply of housing decreases short-run
supply and increases the equilibrium rent.
2. The higher rent increases the quantity of housing
supplied in the short run and stimulates building in the long run. The rent
decreases, and the quantity of housing increases.
3. I f a rent ceiling prevents the rent from increasing, the
quantity supplied remains constant and there is a housing shortage, which creates wasteful
search and black markets.
The Labor Market and the Minimum Wage.
4. A decrease in the demand for low-skilled labor lowers the
wage rate and reduces employment.
5. The lower wage rate encourages people with low skill to
acquire more skill, which decreases the supply of low-skilled labor. The wage rises
gradually to its original level, and employment decreases.
6. Imposing a minimum wage above the equilibrium wage
creates unemployment and an increase in the amount of time people spend searching for a
job.
7. Minimum wages hit young people who have the fewest skills
hardest.
Taxes
8. When a good or service is taxed, usually the price
increases and the quantity bought decreases but the price increases by less than the tax.
The buyer pays part of the tax and the seller pays part of the tax.
9. The portion of the tax paid by the buyer and by the seller depends on the
elasticity of demand and the elasticity of supply.
10. The less elastic the demand and the more elastic the supply, the greater is the
price increase, the smaller is the quantity decrease, and the larger is the portion of the
tax paid by the buyer.
11. If demand is perfectly elastic or supply is perfectly inelastic, the seller pays
the entire tax. If demand is perfectly inelastic or supply is perfectly elastic, the
buyer pays the entire tax.
