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C hapter 6

C hapter 6. Price Ceilings and Price Floors. Economic Principles. Government intervention in markets Price ceilings Price floors Parity pricing Target prices Crop limitation programs. EXHIBIT 1 PRODUCTION POSSIBILITIES CURVE FOR CIVILIAN AND DEFENSE GOODS.

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C hapter 6

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  1. Chapter 6 Price Ceilings and Price Floors

  2. Economic Principles • Government intervention in markets • Price ceilings • Price floors • Parity pricing • Target prices • Crop limitation programs Gottheil - Principles of Economics, 4e

  3. EXHIBIT 1 PRODUCTION POSSIBILITIES CURVE FOR CIVILIAN AND DEFENSE GOODS

  4. Exhibit 1: Production Possibilities Curve for Civilian and Defense Goods The production possibilities curve in Exhibit 1 provides information on: • The production possibilities curve shows the possible combination of civilian and defense goods that could be produced. Gottheil - Principles of Economics, 4e

  5. Exhibit 1: Production Possibilities Curve for Civilian and Defense Goods When there is a national security crisis, the number of civilian goods produced: • The production of civilian goods declines as more defense goods are produced. Gottheil - Principles of Economics, 4e

  6. EXHIBIT 2 THE FISH MARKET BEFORE AND AFTER THE DRAFT

  7. Exhibit 2: The Market Before and After the Draft In Exhibit 2, the community’s predraft and postdraft demand for fish does not change. • Demand for fish doesn’t change just because there’s a national security problem. Gottheil - Principles of Economics, 4e

  8. Exhibit 2: The Market Before and After the Draft In Exhibit 2, the community’s predraft and postdraft demand for fish does not change. • Note that the demand curves before and after the supply curve has shifted are identical. Gottheil - Principles of Economics, 4e

  9. Exhibit 2: The Market Before and After the Draft After the draft, the quantity of fish supplied: • With fishermen being drafted and fewer boats in the water, the supply of fish declines and the supply curve shifts to the left. Gottheil - Principles of Economics, 4e

  10. Exhibit 2: The Market Before and After the Draft Postdraft, the equilibrium price of fish: • The equilibrium price of fish increases from $4 to $10 after the draft. Gottheil - Principles of Economics, 4e

  11. Exhibit 2: The Market Before and After the Draft After the draft, the quantity of fish bought and sold: • The quantity of fish bought and sold declines from 10,000 to 7,000 fish. Gottheil - Principles of Economics, 4e

  12. Exhibit 2: The Market Before and After the Draft The greater burden of the increased price for fish is felt by: • The poor • The rich Gottheil - Principles of Economics, 4e

  13. Exhibit 2: The Market Before and After the Draft The greater burden of the increased price for fish is felt by: • The poor • The rich Gottheil - Principles of Economics, 4e

  14. Exhibit 2: The Market Before and After the Draft The greater burden of the increased price for fish is felt by: • The increase in the price of fish makes it unthinkable for the poor to purchase fish, while the rich hardly notice the increase and continue to buy fish. Gottheil - Principles of Economics, 4e

  15. Price Ceiling Price ceiling • A maximum price set by government below the market-generated equilibrium price. Gottheil - Principles of Economics, 4e

  16. EXHIBIT 3 SETTING A $4 PRICE CEILING IN THE FISH MARKET

  17. Exhibit 3: Setting a $4 Price Ceiling in the Fish Market In Exhibit 3, when a $4 price ceiling is set, the market for fish: • When the price ceiling is set at $4, the quantity of fish demanded increases from 7,000 to 10,000. Gottheil - Principles of Economics, 4e

  18. Exhibit 3: Setting a $4 Price Ceiling in the Fish Market In Exhibit 3, when a $4 price ceiling is set, the market for fish: • Based on the post-draft supply curve, the quantity of fish supplied falls from 7,000 to 4,000. Gottheil - Principles of Economics, 4e

  19. Exhibit 3: Setting a $4 Price Ceiling in the Fish Market In Exhibit 3, when a $4 price ceiling is set, the market for fish: • Based on the postdraft supply curve, there is a shortage—an unsatisfied excess demand—of 6,000 fish. Gottheil - Principles of Economics, 4e

  20. Exhibit 3: Setting a $4 Price Ceiling in the Fish Market Allocate a shortage of goods: • One method is through the use of ration coupons. Gottheil - Principles of Economics, 4e

  21. Exhibit 3: Setting a $4 Price Ceiling in the Fish Market Allocate a shortage of goods: • Ration coupons are issued by the government, entitling the holder to purchase a specific quantity of a good at or below the price ceiling. Gottheil - Principles of Economics, 4e

  22. Exhibit 3: Setting a $4 Price Ceiling in the Fish Market Allocate a shortage of goods: Ration coupons may be issued based on schemes such as: • First come, first served. • Household size. • Lottery. Gottheil - Principles of Economics, 4e

  23. Price Ceiling and Housing Rent control is a government-set price ceiling on rent. Gottheil - Principles of Economics, 4e

  24. Price Ceiling and Housing Arguments against rent control: • It dampens landlords’ incentives to properly maintain their existing rental units. • It discourages many people from investing in new construction. Gottheil - Principles of Economics, 4e

  25. Price Floors Price floor • A minimum price set by government above the market-generated equilibrium price. Gottheil - Principles of Economics, 4e

  26. EXHIBIT 4 EFFECT OF NEW TECHNOLOGY ON THE FISH MARKET

  27. Exhibit 4: Effect of New Technology on the Fish Market When a new technology is adopted, the supply curve in the fish market: • The supply curve shifts the the right. Gottheil - Principles of Economics, 4e

  28. Exhibit 4: Effect of New Technology on the Fish Market After adopting the new technology, total revenue for the fisherman: • Total revenue decreases. Gottheil - Principles of Economics, 4e

  29. Exhibit 4: Effect of New Technology on the Fish Market After adopting the new technology, total revenue for the fisherman: • Prior to adopting the new technology, 10,000 fish were sold at an equilibrium price of $4 each, for a total revenue of $40,000. Gottheil - Principles of Economics, 4e

  30. Exhibit 4: Effect of New Technology on the Fish Market After adopting the new technology, total revenue for the fisherman: • After adopting the new technology, 12,000 fish are sold at an equilibrium price of $2 each, for a total revenue of $24,000. Gottheil - Principles of Economics, 4e

  31. EXHIBIT 5 SETTING A $4 PRICE FLOOR IN THE FISH MARKET

  32. Exhibit 5: Setting a $4 Price Floor in the Fish Market In Exhibit 5, when a $4 price floor is set, the market for fish: • The quantity of fish supplied increases from 12,000 to 15,000. • The quantity of fish demanded declines from 12,000 to 10,000. • A surplus, or excess supply, of 5,000 fish is created. Gottheil - Principles of Economics, 4e

  33. Exhibit 5: Setting a $4 Price Floor in the Fish Market The excess supply of fish can be dealt with: • The decision to support a price floor is a societal matter. • If the community represented by the government wants to support the fishermen through a price floor, then the government will buy the excess supply. Gottheil - Principles of Economics, 4e

  34. EXHIBIT 6 GROWTH OF U.S. AGRICULTURAL PRODUCTIVITY THROUGHOUT U.S. HISTORY * Precise data are not available. Source: James Zelner and R.M. Lamm,“Agriculture’s Vital Role for Us All,” Food—From Farm to Table, 1982 Yearbook of Agriculture, Department of Agriculture, Washington, D.C., p. 3.

  35. Exhibit 6: Growth of US Agricultural Productivity Throughout U.S. History Agricultural productivity has increased in the U.S. because: • Changes in the dominant energy source technology used on farms. Gottheil - Principles of Economics, 4e

  36. Exhibit 6: Growth of US Agricultural Productivity Throughout U.S. History Agricultural productivity has increased in the US because: • Advances in modern chemistry to produce fertilizers, insecticides, crop ripeners and food preservatives. Gottheil - Principles of Economics, 4e

  37. EXHIBIT 7 NUMBER AND SIZE OF U.S. FARMS Source:Public Policy and the Changing Structure of American Agriculture, Congressional Budge Office, The Congress of the United States, Washington, D.C., September 1978, p. 2; Agricultural Statistics, 1995–1996, United States Department of Agriculture, Washington, D.C., 1996. Gottheil - Principles of Economics, 4e

  38. Exhibit 7: Number and Size of U.S. Farms Since 1945, the average size of U.S. farms: • The average size of US farms has steadily increased, from 195 acres in 1945 to 496 acres in 1995. Gottheil - Principles of Economics, 4e

  39. Exhibit 7: Number and Size of U.S. Farms The number of farms in the U.S.: • The number of farms has declined from about 6 million in 1945 to about 2 million by 1995. Gottheil - Principles of Economics, 4e

  40. Source:Economic Report of the President, 2003, Washington, D.C., p. 439. EXHIBIT 8 INDEXES OF TOTAL FARM OUTPUT: 1950–99 (1996 = 100) Gottheil - Principles of Economics, 4e

  41. Exhibit 8: Indexes of Total Farm Output: 1950-99 (1996 = 100) Total farm output in the U.S. between 1950 and 1999 almost: • Fell by one-half • Doubled • Tripled Gottheil - Principles of Economics, 4e

  42. Exhibit 8: Indexes of Total Farm Output: 1950-99 (1996 = 100) Total farm output in the U.S. between 1950 and 1999 almost: • Fell by one-half • Doubled • Tripled Gottheil - Principles of Economics, 4e

  43. EXHIBIT 9 EFFECT OF NEW TECHNOLOGY IN FARMING

  44. Exhibit 9: Effect of New Technology in Farming As new energy source technologies and modern chemistry increase productivity and shift the supply curve to the right, price: • Price declines with each shift of the supply curve to the right. Gottheil - Principles of Economics, 4e

  45. Parity Pricing Parity pricing • Parity pricing describes one criteria used to determine the level at which a price floor should be set. Gottheil - Principles of Economics, 4e

  46. Parity Pricing Parity pricing • It asks for equality between the prices that farmers have to pay for the goods they buy, and the prices they get for the goods they sell. Gottheil - Principles of Economics, 4e

  47. Parity Pricing Parity pricing • Parity pricing was adopted by the government in 1933 when Congress passed the Agricultural Adjustment Act. Gottheil - Principles of Economics, 4e

  48. EXHIBIT 10 SHOES AND CORN: SHIFTS IN DEMANDAND SUPPLY: 1914–2000

  49. Exhibit 10: Shoes and Corn: Shifts in Demand and Supply: 1914-2000 In Exhibit 10, the market for shoes changes from 1914 to 1964: • While the supply curve for shoes remained unchanged, the demand curve for shoes shifted to the right. Gottheil - Principles of Economics, 4e

  50. Exhibit 10: Shoes and Corn: Shifts in Demand and Supply: 1914-64 In Exhibit 10, the market for shoes changes from 1914 to 1964: • The shift in demand raised the equilibrium price for shoes from $2 to $4. Gottheil - Principles of Economics, 4e

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