MGEA02H3 Lecture Notes - Lecture 2: Economic Equilibrium, Price Ceiling, Price Floor

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Controls on prices
- 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
How price ceiling affect market outcomes
- The price that balances supply and demand is below the ceiling, the price ceiling is not binding
(usually no effect on price or quantity sold)
- The equilibrium price is above the price ceiling, the ceiling is a binding constraint on the market
- tend to move price close to equilibrium
- when shortage occurs from price ceiling, mechanism for rationing will occur (buyers who are
willing to arrive early and wait in line to get a come, while those unwilling to wait do not)
- ration to personal bias
- when the government imposes a binding price ceiling on a competitive market, a shortage of
the good arises, and the sellers must ration the scarce goods among the large number of
potential buyers
- rationing mechanism is efficient and impersonal
P.122-124 case study
How price floors affect market outcomes
- an attempt by the government to maintain prices at other than equilibrium levels
- equilibrium price is above the floor, the price floor is not binding
- equilibrium price is below the floor, the price floor is a binding constraint on the market
- market price=price floor
- a binding price floor causes a surplus
P.127-130 case study
Evaluating price controls
- balance supply and demand
- coordinating economic activity
- aimed at helping the poor, but hurts them
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