FMSC 290 Lecture Notes - Lecture 17: Price Ceiling, Price Floor, Economic Equilibrium
1 May 2018
School
Department
Course
Professor
Lecture March 27th, 2018
Controls on prices
• Price controls
o Usually enacted when policymakers believe that the market price of a good or
service is unfair to buyers or sellers
o Can generate inequities
• Taxes
o Used to raise revenue for public purposes and to influence market outcomes
• Price ceiling
o A legal maximum on the price at which a good can be sold
• Price floor
o A legal minimum on the price at which a good can be sold
• How price ceilings affect market outcomes
o Not binding
▪ Set above the equilibrium price
▪ No effect on the price or quantity sold
o Binding constraint
▪ Set below the equilibrium price
▪ Shortage
▪ Sellers must ration the scarce good
• Long lines
• Discrimination according to sellers bias
• How price floors affect market outcomes
o Not binding
▪ Set below the equilibrium price
▪ No effect on the market
Lecture March 29th, 2018
• Exam on Tuesday on 4, 5, and 6
o 30 multiple choice question
▪ 12 questions will be from the study guide/ things from the study guide (not
all direct multiple questions from the study guide)
o what is a normal good, what is substitute good, how shortage is graphed, at what
price surplus happens, applications of elasticity of demand- drug example, are
goods inferior or superior, 2-3 questions minimum wage, government policies,
definitions for cross price, supply and income elasticity, .
o 18 questions from the questions from the textbook test bank
• governments can sometimes prove market outcomes
o want to use price controls
• taxes
o government uses taxes
▪ to raise revenue for public projects
• roads, schools, and national defense
o tax incidence
▪ manner in which the burden of a tax is shared among participants in a
market
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