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Price Ceilings and Price Floors

Price Ceilings and Price Floors. How market prices are “distorted” by Government Policies. In a free, unregulated market system, market forces establish equilibrium prices and quantities.

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Price Ceilings and Price Floors

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  1. Price Ceilings and Price Floors How market prices are “distorted” by Government Policies

  2. In a free, unregulated market system, market forces establish equilibrium prices and quantities. • While equilibrium conditions may be efficient, not everyone will be satisfied with prevailing market price (either too high or too low) • Price controls are usually implemented when it is perceived that the market price is unfair to either buyers OR sellers Supply/Demand and Government Policies---Price Ceilings and Price Floors

  3. Price Ceiling • A legal maximum on the price at which a good can be sold. • Price Floor • A legal minimum on the price at which a good can be sold. Supply/Demand and Government Policies---Price Ceilings and Price Floors

  4. We are going to examine a PRICE CEILING first…

  5. 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 Supply/Demand and Government Policies---Price Ceilings and Price Floors

  6. S* Price Of ___ Pe Pceiling D* Qs Qe Qd Quantity of _____________ If a market price is deemed to be too high, the government can impose a PRICE CEILING. This happened in the 1970’s when we experienced rapid inflation and state and Local governments often threaten to impose price ceilings when natural disasters occur .

  7. S* Price Of ___ Pe Pceiling D* Qs Qe Qd Quantity of _____________ With the Price at Pceiling, we now find the market will Supply Qs but Demand Qd…The Market is in Dis-equalibrium. DEMAND IS GREATER THAN SUPPLY!!!

  8. S* Price Of ___ Pe Pceiling D* Qs Qe Qd Quantity of _____________ Because the Price is a binding Price Ceiling, it cannot go higher…There will be shortages In this market

  9. S* Price Of ___ The Price WANTS to Push Up through The Price Ceiling to get to the Market Equilibrium price Pe. Pe Pceiling D* Qs Qe Qd Quantity of _____________

  10. S* Price Of ___ Think of it as trying to push through The ceiling of your house to get the “peak”…. Pe Pceiling D* Qs Qe Qd Quantity of _____________

  11. S* Price Of ___ Pe Pceiling Shortage D* Qs Qe Qd Quantity of _____________ With the Price Ceiling there will be SHORTAGES OF THE GOOD

  12. A Price Floor in a government impose price that is ABOVE the prevailing Market Price. • For a particular industry (or group of people) the market price is considered too low) • Minimum Wage and Agricultural Commodities (wheat, corn, ect) are common targets for price floor implemtation PRICE FLOOR

  13. Market for ______ S* Price Of ___ PFloor Pe D* Qd Qe Qs Quantity of _____________ If the market price is too low then the government may impose a Price Floor so that the recipient of the good or service (supplier) can receive a higher price than they otherwise would receive.

  14. Market for ______ S* Price Of ___ PFloor Pe D* Qd Qe Qs Quantity of _____________ At the price Pfloor the market is in disequilibrium, Quantity Demanded Is LESS THAN Quantity Supplied.

  15. Market for ______ S* Price Of ___ The Market is trying To push the price Down to Pe but the Binding Price Floor Will not allow it. PFloor Pe D* Qd Qe Qs Quantity of _____________ At the price Pfloor the market is in disequilibrium, Quantity Demanded Is LESS THAN Quantity Supplied.

  16. Market for ______ S* Price Of ___ PFloor Think of is as Stomping on The FLOOR to get DOWN to The Market Price. Pe D* Qd Qe Qs Quantity of _____________ At the price Pfloor the market is in disequilibrium, Quantity Demanded Is LESS THAN Quantity Supplied.

  17. Market for ______ S* Price Of ___ PFloor Surplus Pe D* Qd Qe Qs Quantity of _____________ At the price Pfloor the market is in disequilibrium, Quantity Demanded Is LESS THAN Quantity Supplied. There will be a SURPLUS of this Good or Service in this Market.

  18. Market for ______ S* Price Of ___ PFloor Surplus Pe D* Qd Qe Qs Quantity of _____________ If this were an agricultural commodity, farmers would tend to OVER PRODUCE. In this case the Federal Govt usually BUYS the commodity From the farmers and either stockpiles it OR uses it for foreign food aid.

  19. Market for ______ S* Price Of ___ PFloor Surplus Pe D* Qd Qe Qs Quantity of _____________ The govt were to set the Minimum Wage at Pfloorand the prevailing Market wage COULD BE Pe, then there would be a SURPLUS of Labor, Which means there will HIGHER unemployment than there “normally” Would be WITHOUT the Price Floor.

  20. They distort the market price for a good or service. • Usually imposed for a political reason and are not necessarily “Bad OR Good”… • Just realize that with price controls the winners are usually EASY to see but the losers are largely “UNSEEN”—(i.e. Basitiat) • Benefits are concentrated and Costs are dispersed… Bottom Line on Price Ceilings and Price Floors

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