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ECN 104 (447)

Chapter 6: Supply, Demand and Government Polices

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ECN 104
Tsogbadral Galaabaatar

Chapter 6Supply Demand and Government Polices Control on Prices y The government imposes a legal maximum on the price at which goods can Price Ceiling be sold o A legal maximum on the price at which a good can be sold y Government also imposes a legal minimum on price Price Flooro A legal minimum on the price at which a good can be soldHow Prince Ceilings Affect Market Outcomes Price Ceilings y Two outcomes are possible when the government imposes a price ceiling 1 If the price that balances supply and demand is below the ceiling the price ceiling is not binding 2 If the equilibrium is above the ceiling it is considered a binding constraint y If the market price equals the ceiling price the demand becomes greater than supply When a shortage of goods develops because of the price ceiling mechanisms naturally develop 1 Buyers who arrive early and wait in line to purchase the
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