Page 121 - Krugmans Economics for AP Text Book_Neat

figure 8.1 The Market for Apartments in the Absence of Government Controls

Monthly rent
(per apartment)
Quantity of apartments
S (millions) Section 2 Supply and Demand
$1,400
Monthly rent Quantity Quantity
1,300 (per apartment) demanded supplied
1,200 $1,400 1.6 2.4
1,300 1.7 2.3
1,100
E 1,200 1.8 2.2
1,000 1,100 1.9 2.1
1,000 2.0 2.0
900
900 2.1 1.9
800
800 2.2 1.8
700 700 2.3 1.7
600 2.4 1.6
600
D

0 1.6 1.7 1.8 1.9 2.0 2.1 2.2 2.3 2.4
Quantity of apartments (millions)

Without government intervention, the market for apart- $1,000 per month and 2 million apartments rented.
ments reaches equilibrium at point E with a market rent of

demanded rises to 2.2 million, 200,000 more than in the unregulated market and
400,000 more than are actually available at the price of $800. So there is now a persistent
shortage of rental housing: at that price, 400,000 more people want to rent than are able
to find apartments.

figure 8.2

The Effects of a Monthly rent
Price Ceiling (per apartment)
The black horizontal line represents the S
government-imposed price ceiling on $1,400
rents of $800 per month. This price ceil-
ing reduces the quantity of apartments
supplied to 1.8 million, point A, and in- 1,200
creases the quantity demanded to 2.2
million, point B. This creates a persistent E
shortage of 400,000 units: 400,000 peo- 1,000
ple who want apartments at the legal rent Price
of $800 but cannot get them. A B ceiling
800
Housing shortage
600 of 400,000 D
apartments caused
by price ceiling

0 1.6 1.8 2.0 2.2 2.4
Quantity of apartments (millions)

module 8 Supply and Demand: Price Controls (Ceilings and Floors) 79