ECON1101 Chapter Notes - Chapter 4: Consumer Complaint, Price Ceiling, Price Controls
Chapter 4
Government price controls:
Price ceiling
: a government price control that sets a maximum allowable price for a good
• Often used if equilibrium price is to high (rent control), consumer
complaint
Can lead to:
• Shortage of goods
• Introduction of ration coupons → difficult to be given out in fairness
• Long waiting lines → people could be doing something better with there
time
• Can be discriminatory to purchasers (don't rent apartment to ethnic
people)
• Reduced quality of good
• Development of black markets → illegal, theft, fraud
• May not target appropriate market: well off people in cheap rent
controlled apartments
Price floor: a government price that sets a minimum allowable price for a good
• If equilibrium price is too low (minimum wage) , producer complaint
• Leads to surplus
• Resources used to build grain silos could have been used to hire doctors,
teachers
• Undeveloped, unfarmed land could be used for other purposes e.g.
housing
• Hard to target market: wealthy farmers end up benefiting and poor
workers may lose their job while well off teens get paid a higher wage
Price elasticity
• Price elasticity of demand: percentage change in quantity demanded/
percentage change in price
• High elasticity in demand → great change in demand when price changes
• Quantity demanded is negatively related to the price, due to the shape of
the curves
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Document Summary
: a government price control that sets a maximum allowable price for a good: often used if equilibrium price is to high (rent control), consumer complaint. Can lead to: shortage of goods, long waiting lines people could be doing something better with there. Price floor: a government price that sets a minimum allowable price for a good. Goods for which the price elasticity is greater than one have an elastic demand. Goods for which the price elasticity is less than one have an inelastic demand. Perfectly elastic demand: horizontal line, many comparable substitutes: revenue = quantity x price, if price increases quantity also decreases. Income elasticity: percentage change in quantity demanded/percentage change in income, refers to a shift in the demand curve. Cross price elasticity of demand: percentage change in quantity demanded/ percentage change in price of another good, for a complement the cross price elasticity of demand is negative, refers to a shift in the demand curve.
