Chapter 6: Supply, Demand and Government Polices

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Control on prices: y the government imposes a legal maximum on the price at which goods can be sold. Price ceiling: a legal maximum on the price at which a good can be sold y government also imposes a legal minimum on price. Price floor: a legal minimum on the price at which a good can be sold. If the market price equals the ceiling price, the demand becomes greater than supply. Price floors y two outcomes are possible when the government imposes a price floor: if the equilibrium price is above the floor, the price floor is not binding. Price floor has no effect on the market: if the equilibrium price is below the floor it forces supply and demand to move price towards the equilibrium price. At the floor quantity supplied exceeds quantity demanded. Evaluating price controls y prices have the crucial job of balancing supply and demand.

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