EC120 Lecture Notes - Lecture 3: Price Ceiling, Price Floor, Price Controls

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1 Feb 2019

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Analyzes the various types of government policy using only the tools of supply and. Supply, demand and government policies demand: we begin by considering policies that directly control prices. Usually to protect consumers with low incomes. No rent more than /month: let"s assume that the government imposes a price ceiling on the market for ice cream, two outcomes are possible: A) if the price ceiling > pe. The price ceiling is not binding (does not affect the market) If the price ceiling is above the equilibrium price it doesn"t affect the market (not binding) B) if the price ceiling is < pe. The price ceiling is binding (it affects the market) So the market price = price ceiling, and qs < qd (shortage) Usually to protect sellers/workers with low income. Minimum wage: let"s assume that the government imposes a price floor on the market for ice cream, two outcomes are possible: A) if the price floor < pe.

Related Questions

A recent study found that the demand and supply schedules for flying disks are as follows:

Price	Quantity Demanded	Quantity Supplied
(Dollars per disk)	(Millions of disks)	(Millions of disks)
11	1	15
10	2	12
9	4	9
8	6	6
7	8	3
6	10	1

Complete the first row of the following table by indicating the equilibrium price and the equilibrium quantity of flying disks in the absence of any price controls.

Scenario	Market Price	Market Quantity	Binding or Not Binding
Scenario	(Dollars per disk)	(Millions of disks)	Binding or Not Binding
No Price Control			N/A
Price Floor
Price Ceiling

Flying disk manufacturers persuade the government that flying disk production improves scientists' understanding of aerodynamics and thus is important for national security. A concerned Congress votes to impose a price floor $2 above the equilibrium price.

Complete the second row of the previous table by indicating the new price and quantity of flying disks when Congress imposes a price floor $2 above the equilibrium price. Then indicate whether the price floor is binding or not binding.

Irate college students march on Washington and demand a reduction in the price of flying disks. An even more concerned Congress votes to repeal the price floor and impose a price ceiling $3 below the former price floor.

Complete the final row of the previous table by indicating the new price and quantity of flying disks when Congress imposes a price ceiling $3 below the former price floor. Then indicate whether the price ceiling is binding or not binding.

ochrejackal539

Price CSO 01 02 03 04 Quantity 27. Refer to figure F998. If the market in this figure is in equilibrium at P Q. and the demand curve shifts to Do what will happen if the government imposes a price ceiling at Pı? a. There will be an increase in supply to regain equilibrium b. A surplus of the amount D-A will occur. C. A shortage of the amount Q3 - Q1 will occur. d There will be Qi units actually bought. e. Both c and d.

"Shortages, price controls, and queuesDuring the late 1980s and early 1990s, economic reforms initiated by Soviet president Mikhail Gorbachev began to raise consumer incomes; however, the Soviet government continued to impose price ceilings on basic goods like food, clothing, and household goods. As higher income led to increased demand, severe shortages of many goods and long lines at all kinds of stores became common. Finally, in January 1992, a new Russian government under president Boris Yeltsin removed retail price controls on most goods. Within a month, prices more than doubled on average, and lines disappeared. Analyze these events using the supply and demand model. First draw a supply and demand diagram for some normal good such as butter. Show the market in equilibrium at a price of 1 ruble per kilo before the beginning of the Gorbachev reforms. Draw a horizontal line at that level to represent the price ceiling; no butter can be sold for more than 1 ruble per kilo. Next show the effect of rising income. Does it shift the supply curve? Does it shift the demand curve? What is the shortage or surplus at the controlled price? After the price control ends, assuming no further shift in the supply and demand curve, what happens to the price? What happens to the shortage or surplus?"

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EC120 Lecture Notes - Lecture 3: Price Ceiling, Price Floor, Price Controls

EC120 Full Course Notes

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