DANCEST 805 Lecture Notes - Lecture 10: Ceteris Paribus, Price Ceiling, Economic Equilibrium
1. PRICE:
- Price as a rationing device:
▪ Rationing device is needed, as a result of scarcity, to determine who gets what of the
available limited resources and goods. It rations resources/ goods to the producers/
buyers who pay the price for the resources/goods.
▪ Every rationing device discriminates against someone. In a world where dollar price isn’t
the rationing device, people are likely to produce much less than in a world where dollar
price is the rationing device.
- Price as a Transmitter of information that is often relates to the relative scarcity of a good. A
market system is powerful enough to have people respond in appropriate ways to the
information that price is transmitting, even if people do not fully hear or understand that
information.
- Price control: 2 types of price controls
Price ceiling
Definition: a government-mandated maximum price above which legal trades cannot be made
Effects:
(1) Shortages: when Price ceiling is lower than Equilibrium price, there is a shortage. When a
shortage exists, price and output tend to rise to equilibrium. But when a price ceiling exists,
they cannot rise to equilibrium because it is unlawful to trade at the equilibrium price.
(2) Fewer exchanges: the demand curve is above the supply curve for quantity less than the
equilibrium quantity. Accordingly, the maximum buying price is greater than the minimum
selling price for all units less than the equilibrium quantity. But no more than the quantity
whose point is the intersecting point between demand curve and supply curve will be
produced and sold. Thus, the price ceiling prevents mutually advantageous trades from
being realized.
(3) Nonprice-rationing devices: price-ceilings prevent price from rising to the level sufficient to
ration goods fully (that level sufficient is the equilibrium price). If price is responsible for
only part of the rationing, the rest is only accounted for by some other nonprice rationing
device, such as first come, first serve
(4) Buying and selling at a prohibited price:
(5) Tie-in sales: a sale whereby one good can be purchased only if another good is also
purchased
Buyers and higher and lower price: Price ceilings are often lower than equilibrium price. Buyers
prefer lower prices to higher prices. However, price ceilings come with those effects above
Buyers prefer lower prices to higher prices, ceteris paribus.
Price ceilings and fall information: Price ceilings (that are below the equilibrium price) prevent
the correct information about the increased relative scarcity of goods from getting through to
consumers. Buyers get a false view of reality; then they base their buying behavior on incorrect
Document Summary
Price as a rationing device: rationing device is needed, as a result of scarcity, to determine who gets what of the available limited resources and goods. It rations resources/ goods to the producers/ buyers who pay the price for the resources/goods: every rationing device discriminates against someone. In a world where dollar price isn"t the rationing device, people are likely to produce much less than in a world where dollar price is the rationing device. Price as a transmitter of information that is often relates to the relative scarcity of a good. A market system is powerful enough to have people respond in appropriate ways to the information that price is transmitting, even if people do not fully hear or understand that information. Price control: 2 types of price controls. Definition: a government-mandated maximum price above which legal trades cannot be made. Effects: (1) shortages: when price ceiling is lower than equilibrium price, there is a shortage.
