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Price Ceilings and Price Floors!

Price Ceilings and Price Floors! . Supply, Demand, and Government Policies . In a unregulated market system with open entry and exit, market forces establish equilibrium prices and quantities. While equilibrium conditions may be efficient, not everyone will be satisfied with the outcomes.

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Price Ceilings and Price Floors!

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  1. Price Ceilings and Price Floors!

  2. Supply, Demand, and Government Policies • In a unregulated market system with open entry and exit, market forces establish equilibrium prices andquantities. • While equilibrium conditions may be efficient, not everyone will be satisfied with the outcomes. • Consumers • Producers

  3. Price Controls… • Are usually enacted when policymakers believe the market price is unfair to buyers or sellers. • Result in government-created price ceilings or pricefloors.

  4. Price Ceiling and Price Floor Price Ceiling • A legally established maximum price at which a good can be sold. Price Floor • A legally established minimum price at which a good can be sold.

  5. Price Ceiling Two outcomes are possible when the government imposes a price ceiling: The price ceiling is not binding if set above the equilibrium price. The price ceiling is binding if set below the equilibrium price, leading to a shortage.

  6. Price ceiling Price Ceiling that is NOT Binding Price of Oranges-lb Supply 4 $3 Equilibrium price Demand 0 Quantity of Oranges lbs 100

  7. Equilibrium price Price ceiling Shortage 75 125 Quantity supplied Quantity demanded Price Ceiling that IS Binding Price of Oranges-lb Supply $3 2 Demand 0 Quantity of Oranges-lbs

  8. Effects of Price Ceiling A binding price ceiling creates… • shortages becauseQD > QS • Gasoline shortage of the 1970s • nonprice rationing • Long lines • Discrimination by sellers

  9. Rationing Resources • Price Rationing • Efficient • Impersonal • Non-price Rationing • Long lines • Waste buyers time  Inefficient • Discrimination by sellers: • Goods may not go to buyer who value it most highly  Inefficient • Potentially unfair

  10. Lines at the Gas Pump In 1973, OPEC raised the price of crude oil in world markets. Because crude oil is the major input used to make gasoline, the higher oil prices reduced the supply of gasoline. What was responsible for the long gas lines? Economists blame government regulations that limited the price oil companies could charge for gasoline.

  11. Supply 1. The price ceiling is not Price ceiling binding . . . P1 Demand Q1 Initially … Price of Gasoline Quantity of Gasoline

  12. S2 2. supply falls . . . S1 Price ceiling 3. . . . the price P1 ceiling becomes 4. . . . binding . . . resulting in a Demand shortage. QS QD Q1 Then … Price of Gasoline P2 Quantity of Gasoline

  13. Rent Control • Rent controls are ceilings placed on the rents that landlords may charge tenants • Goal: to help the poor by making housing more affordable • New York City rent controls were enacted as a WWII emergency measure • Some units still under rent control today • Many rich tenants in rich neighborhoods paying low WWII prices.

  14. Controlled rent Shortage Rent Control in the Long Run... Rental Price of Apartment Supply Demand 0 Quantity of Apartments

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