Econ 1120
Professor Wissink
Fall 2016
Week 4: Lecture 1 of 2
Tuesday, September 13th
Keywords: Price Floors, Price Ceiling, Quantity Quota, Macroeconomics, Business cycle, Growth,
Aggregate output, recession, depression
1. Three Government Interventions:
a. Price Floors
i. Government established binding minimum selling price. ii. Must be set above what natural equilibrium price would be, P*
iii. Government establishes minimum selling price because they believe the market
price is too low
iv. Creates a surplus
v. Examples
1. Agricultural markets - government sets minimum price so that farmers can
make a living and they can keep farming.
2. Minimum Wage - government sets minimum wage so people can have enough
money to live on. 3. By setting minimum wage, more people want to work than there are jobs, creating a suplus of labor.
b. Price Ceiling i. Government established maximum selling price
ii. Must be set below the natural equilibrium price would be, P*
iii. Government establishes maximum selling price when they believe the market price
is too high.
iv. Creates a shortage
1. Sellers are not willing to supply a lot of units if the price is lower.
v. Examples
1. Gas price ceilings - government might not allow gas prices to become out of
control
2. Government considers putting price ceiling in pharmaphutical industry
3. Apartment rent control - government says a certain amount of apartments in
an urban area must be under a certain dollar amount
a. Quantity Quota
i. Government established maximum number of units sold
ii. Qmax must be below Q*
iii. Government things too many units are being traded.
iv. Example: import restrictions
v. Creates higher prices
2. Macroeconomics
a. Macroeconomics came about when microeconomic models could not explain prolonged
existence of high unemployment during the Great Depression.
b. Macroecoonomic Concerns:
i. Output/Production
ii. Income/Employment
iii. Price Levels/Interest Rates
iv. Global Trade
v. Growth
c. Output & Growth
i. Business cycle - cycle of short-term ups and downs in the economy. ii. Growth - looks at what happens to output and other things over long periods of
time.
iii. Aggregate output 1. Mean measure of how the economy is doing
2. Is the total quantity of goods and services produced in an economy in a given
period.
iv. Recession
1. Period in which aggregate output declines. 2. Two consecutitve quarters of decrease in output signals recession
v. Depression
1. Prolonged/deep recession.
2. More than two periods of consecutive decrease.