01/27-01/29 Chapter 5
RECAP: Market equilibrium is when market price moves to the level at which quantity
supplied equals quantity demanded.
Why government control prices:
Price controls: legal restrictions on how low or high a market price may go.
- Price ceilings: maximum price sellers are allowed to charge for a good or
o Usually imposed during crisis. (harvest failures, natural disasters, wars…)
- Price floors: minimum price buyers are required to pay for a good or service.
Modeling a Price Ceiling:
- Now government imposes a ceiling of limiting rents below 800 landlords less
incentive to offer apartments so they won’t be as willing to supply as many as
they would at equilibrium. Additionally, more people would want to rent for the
price of 800. So there is a shortage of rental
houses. (Displayed image below) But if it
was above 1,000 then there would not be
an effect. 01/27-01/29 Chapter 5
How price ceiling causes inefficiency:
1. Inefficiently Low Quantity:
- Deadweight loss: is the loss in total surplus that occurs whenever an action or
policy reduces the quantity transacted below the efficient market equilibrium
quantity. (area above the supply curve and below the demand curve.
2. Inefficient Allocation
- Some people who want
the good badly and are
willing to pay a high
price don’t get it, and
some who care
relatively little about the
good and are only
willing to pay a low price
do get it. 01/27-01/29 Chapter 5
o Eg. Someone who is willing to pay a lot for an apartment and someone
who is not willing to pay a lot and doesn’t want it anyways. The person
who isn’t willing to pay a lot can rent it to the person who wants to pay a
lot and they will both be made better off.
3. Wasted Resources:
- People expend money, effort, and time to cope with the shortages caused by the
4. Inefficiently Low Quality:
- Sellers offer low-quality goods at a low price even though buyers would prefer a
higher quality at a higher price.
5. Black Market:
- A market in which goods or services are bought and sold illegally, either because
it is illegal to sell them at all or because the price charged are legally prohibited
by price ceiling.
3 common results in price ceiling:
1. Persistence shortage of the good