EC120 Lecture Notes - Lecture 6: Economic Equilibrium, Price Ceiling, Price Floor
EC120 – Chapter 6: Supply, Demand, and Government Policies
GOVERNMENT POLICIES AFFECT PRIVATE MARKET OUTCOMES
- Price Controls:
• Price ceiling: A legal maximum on the price of a good or service. E.g. rent control
• Price floor: A legal minimum on the price of a good or service. E.g. minimum wage
- Taxes: The government can make buyers or sellers pay a specific amount on each unit
bought/sold.
- We will s=use the supply/demand model to see how each policy affects the market equilibrium.
• The price buyers pay, the price sellers receive, and the equilibrium quantity.
PRICE CONTROL
PRICE CEILING
- Non-binding price ceiling: Maximum price is greater than market equilibrium price. No effects
on the market outcome. It is a price ceiling above the equilibrium price.
- Binding price ceiling: Maximum price is less than market equilibrium price. Causes a shortage
(excess demand). It is a price ceiling below the equilibrium price.
- Binding price ceiling creates a larger excess demand.
SHORTAGE AND RATIONING
- With a shortage: Sellers must ration the goods among buyers.
- Rationing Mechanisms:
• Sellers’ Disriiatio/Biases.
• Time (waiting)
• Price (willingness to pay)
- Price ceilings create shortages and prevent price to be used as an efficient rationing mechanism.
PRICE FLOOR
- Non-binding price floor: Minimum price is less than equilibrium price. Has no effect on the
market outcome. It is a price floor below the equilibrium price.
- Binding price floor: Minimum price is more than market equilibrium price. Causes a surplus
(excess supply). It is a price floor above the equilibrium price.
EVALUATING PRICE CONTROLS
- Recall one of the Ten Principles from Chapter 1: Markets are usually a good way to organize
economic activity.
- Prices are Signals:
• The guide the alloatio of soiet’s resoures.
• Allocations are altered when policymakers restrict prices.
TAXES
- Why do government levy Taxes?
• Raise revenue to pay for services: national defence, healthcare, public schools, etc.
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Document Summary
Ec120 chapter 6: supply, demand, and government policies. Price controls: price ceiling: a legal maximum on the price of a good or service. E. g. rent control: price floor: a legal minimum on the price of a good or service. Taxes: the government can make buyers or sellers pay a specific amount on each unit bought/sold. We will s=use the supply/demand model to see how each policy affects the market equilibrium: the price buyers pay, the price sellers receive, and the equilibrium quantity. Non-binding price ceiling: maximum price is greater than market equilibrium price. It is a price ceiling above the equilibrium price. Binding price ceiling: maximum price is less than market equilibrium price. It is a price ceiling below the equilibrium price. Binding price ceiling creates a larger excess demand. With a shortage: sellers must ration the goods among buyers. Rationing mechanisms: sellers" dis(cid:272)ri(cid:373)i(cid:374)atio(cid:374)/biases, time (waiting, price (willingness to pay)
