ECN 104 Lecture Notes - Lecture 6: Demand Curve, Ice Cream Cone, Tax Incidence

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Chapter 6 supply, demand and government policies. Price ceiling: a legal maximum on the price at which a good can be sold. Price floor: a legal minimum on the price at which a good can be sold. When the government imposes a binding price on a competitive market, a shortage of the good arises, and sellers must ration the scarce goods among the large number of potential buyers. Let"s assume that the government imposes a price on ice cream. The price ceiling is not binding on the market and the market price will equal the equilibrium price. The price ceiling is a binding constraint on the market and the market price will equal the price ceiling. Let"s assume that the government imposes a price floor on the ice cream market. The price floor is not binding and the market and the market price will equal the equilibrium price.

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