ECON 2100 Lecture Notes - Lecture 6: Price Ceiling, Price Floor, Economic Equilibrium

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Published on 14 Sep 2016
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Chapter 6- Supply, Demand and Government Policies
Government Policies that Alter the Private Market Outcome
- Example: the market for apartments
A price ceiling above the equilibrium price is not binding- meaning has no effect on the market
outcome.
In the apartment example, the ceiling is a blinding constraint on the price of an apartment.
Shortages and Rationing:
With a shortage, sellers must ration the goods among buyers. Some rationing mechanisms:
1. Waiting in long lines
2. Ration coupons that entitle people to buy a certain amount of a product: Ex: When you buy two,
get $1.00 off.
Black Market- A market in which illegal trading takes place at market-determined prices.
It is very difficult to stop the price system from operating, even with government efforts.
A price floor below the equilibrium price is not binding- has no effect on the market outcome.
If the equilibrium wage is $4, then it is below the floor at $5 and is therefore illegal. The floor is a
binding constraint on the wage, causes a surplus. (labor)
Example: A 10% increase in the min wage raises teen unemployment by 1-3%.
Active Learning- The Market for hotel rooms: If the equilibrium is at $100, then a $90 price
ceiling would be illegal since the equilibrium is above the ceiling and causes a binding constraint-
shortage. If there is a $90 price floor, this is also set below the equilibrium and therefore has no
effect on the overall market. At a $120 price floor, this would be illegal because the floor is
above the equilibrium of $100 and therefore is a binding constraint, causing a surplus.
- Evaluating Price Controls
One of Ten Principles: Markets are usually a good way to organize economic activity.
Price controls often intended to help the poor, but often hurt more than help.
Ex: Minimum wage, rent control, tuition control, and gas price control
- The Incidence of Taxes
The tax can be a % of the good’s price, or a specific amount for each unit sold.
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