COMMERCE 1B03 Chapter Notes - Chapter 6: Price Ceiling, Price Floor, Equilibrium Point
4 Feb 2014
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Microeconomics chapter 6 (supply, demand, and government policy) Price ceiling a legal maximum on the price of a good/service. Price floor a legal minimum on the price of a good/service. How price controls affect the demand and supply graph: A price ceiling above the equilibrium price is not binding (doesn"t affect anything) A price floor under the equilibrium price is not binding (doesn"t affect anything) When the equilibrium price is above the price ceiling, there is a binding constraint on the price. In the long-run, supply and demand become more price-elastic, resulting in a larger shortage. When a shortage occurs, sellers must ration goods among buyers. This mechanisms are unfair and is inefficient (goods don"t go to those who value them highly) When prices are not controlled, goods go to those who value them most highly and trade is impersonal, thus fair. When the equilibrium price is below the price floor, there is a binding constraint on the price.
