Principles of Microeconomics / Unit 3 MIC 0218 worked example, 60 to 90 seconds
A Credit Market: Shift and Usury Cap
The idea
Analyze a credit market with the four steps and the binding test. Draw the market with the interest rate on the vertical axis and the quantity of funds on the horizontal. Decide whether the event changes savers or borrowers, and which way. Read the new rate and quantity. Then, for a usury law, a legal ceiling on the rate, compare the ceiling with the equilibrium: above it, no effect; below it, a credit shortage, in which willing borrowers are refused at the legal rate.
In practice
Worked example: the market for small-business loans clears at eight percent with four hundred million dollars lent. New software lets lenders judge applications more cheaply, shifting the supply of funds right: the rate falls to seven percent and lending rises to four hundred sixty million. Now the state caps small-business rates at nine percent: above seven, so nothing happens. A cap at five percent binds: borrowers want six hundred million at five percent and lenders offer three hundred million, a credit shortage of three hundred million.
Where people slip
The refused borrowers are the cost of the cap, and they are invisible in the loan statistics because no loan was made. Most usury caps sit above market rates and bind nothing; the test is always the comparison with equilibrium, not the existence of the law.
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