ECON-1006EL Chapter Notes - Chapter 5: Price Controls, Price Floor, Shortage
23 May 2018
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Chapter 5: Price Controls
Definitions
Partial-Equilibrium
Analysis
The analysis of a single market in isolation, ignoring any feedbacks that may
come from induced changes in other markets
General-Equilibrium
Analysis
The analysis of all the economy’s markets simultaneously, recognizing the
interactions among the various markets
Sellers’ Preferences
Allocation of commodities in excess demand by decisions of the sellers
Black Market
A situation in which goods are sold at prices that violate a legal price control
Key Points
• No market or industry exists in isolation from the economy’s many other markets.
• If a specific market is quite small relative to the entire economy, changes in the market
will have relatively small effects on other markets. The feedback effects on the original
market will, in turn, be even smaller. In such cases, partial-equilibrium analysis can
successfully be used to analyse the original market.
• General-equilibrium analysis is the study of how all markets function together, taking
into account the various relationships and feedback effects among individual markets.
• At any disequilibrium price, quantity exchanged is determined by the lesser of quantity
demanded or quantity supplied.
• Binding price floors lead to excess supply. Either an unsold surplus will exist, or
someone (usually the government) must enter the market and buy the excess supply.
• Binding price ceilings lead to excess demand, with the quantity exchanged bring less than
free-market equilibrium.
• Binding price ceilings can always create the potential for a black market because a profit
can be made by buying at the controlled price and selling at the (illegal) black-market
price.
• To the extent that binging price ceilings give rise to a black market, it is likely that the
government’s objectives motivating the imposition of the price ceiling will be thwarted.
• For each unit of a product, the price on the market demand curve shows the value to
consumers from consuming that unit.
• For each unit of product, the price on the market supply curve shows the lowest
acceptable price to firms for selling that unit. This lowest acceptable price reflects the
additional cost to firms from producing that unit.
• For any given quantity of product, the area below the demand curve and above the supply
curve shows the economic surplus associated with the production and consumption of
that product.
• A competitive market will maximize economic surplus and therefore be efficient when
price is free to achieve its market-clearing equilibrium level.
• The imposition of a binding price ceiling or price floor in an otherwise free and
competitive market leads to market inefficiency.
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Document Summary
The analysis of a single market in isolation, ignoring any feedbacks that may come from induced changes in other markets. The analysis of all the economy"s markets simultaneously, recognizing the interactions among the various markets. Allocation of commodities in excess demand by decisions of the sellers. A situation in which goods are sold at prices that violate a legal price control. Key points: no market or industry exists in isolation from the economy"s many other markets. If a specific market is quite small relative to the entire economy, changes in the market will have relatively small effects on other markets. The feedback effects on the original market will, in turn, be even smaller.
