ECO101H1 Lecture Notes - Lecture 4: Price Ceiling, Price Floor, Economic Equilibrium

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20 Apr 2016

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Price ceiling: a legal maximum on the price of a good or service. Price floor: a legal minimum on the price of a good or service. The government can make buyers or sellers pay a specific amount on each unit. A price ceiling above the equilibrium price is not binding, leading to no effect on the market outcome. A price ceiling below the equilibrium price is a binding constraint on the price, causing a shortage. In the long run, supply and demand are more price-elastic. The supply and demand curves get flatter over time in the case, and therefore the distance between demand and supply increase, leading to larger shortages. A price floor below the equilibrium price is not binding, leading to no effect on the market outcome. A price floor above the equilibrium price is a binding constraint, leading to a surplus. Government uses taxes to create revenue for national defense, public schools, etc.

Related Questions

A recent study found that the demand and supply schedules for flying disks are as follows:

Price	Quantity Demanded	Quantity Supplied
(Dollars per disk)	(Millions of disks)	(Millions of disks)
11	1	15
10	2	12
9	4	9
8	6	6
7	8	3
6	10	1

Complete the first row of the following table by indicating the equilibrium price and the equilibrium quantity of flying disks in the absence of any price controls.

Scenario	Market Price	Market Quantity	Binding or Not Binding
Scenario	(Dollars per disk)	(Millions of disks)	Binding or Not Binding
No Price Control			N/A
Price Floor
Price Ceiling

Flying disk manufacturers persuade the government that flying disk production improves scientists' understanding of aerodynamics and thus is important for national security. A concerned Congress votes to impose a price floor $2 above the equilibrium price.

Complete the second row of the previous table by indicating the new price and quantity of flying disks when Congress imposes a price floor $2 above the equilibrium price. Then indicate whether the price floor is binding or not binding.

Irate college students march on Washington and demand a reduction in the price of flying disks. An even more concerned Congress votes to repeal the price floor and impose a price ceiling $3 below the former price floor.

Complete the final row of the previous table by indicating the new price and quantity of flying disks when Congress imposes a price ceiling $3 below the former price floor. Then indicate whether the price ceiling is binding or not binding.

ochrejackal539

1. The language of price controls

Suppose that, in a competitive market without government regulations, the equilibrium price of gasoline is $3.00 per gallon.

Complete the following table by indicating whether each of the statements is an example of a price ceiling or a price floor and whether it is binding or nonbinding.

Statement	Price Control	Binding or Not
Due to new regulations, gas stations that would like to pay better wages in order to hire more workers are prohibited from doing so.	price ceiling/price floor	binding/non
The government has instituted a legal minimum price of $2.70 per gallon for gasoline.price ceiling/price floor
The government prohibits gas stations from selling gasoline for more than $3.40 per gallon.price ceiling/price floor

A ban was imposed on the export of oranges to EconoLand. As the Minister of Agriculture you are concerned that this ban could result in a shortage of oranges. Your advisors provide the following recommendations: Â· Advisor 1: impose a binding price ceiling. Â· Advisor 2: impose a binding price floor. Â· Advisor 3: take no action at all.

Determine with regard to demand, supply, price and quantity:

(i) The impact of the ban on the market for oranges in EconoLand.

(ii) The impact on the market for oranges in EconoLand if each recommendation is implemented.

Your answer options for each one of demand, supply, price and quantity are:

Decrease toward Equilibrium
Increase Equilibrium price
Excess Supply
Decrease Equilibrium price
No Impact
Increase Equilibrium quantity
Increase toward equilibrium
Decrease Equilibrium quantity
Change in price uncertain
Shift inwards/ to the left
Excess Demand
Change in quantity uncertain
Shift outward/ to the right

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ECO101H1 Lecture Notes - Lecture 4: Price Ceiling, Price Floor, Economic Equilibrium

ECO101H1 Full Course Notes

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