Presentation on theme: "Price Ceilings and Price Floors!. Supply, Demand, and Government Policies u In a unregulated market system with open entry and exit, market forces establish."— Presentation transcript:
Price Ceilings and Price Floors!
Supply, Demand, and Government Policies u In a unregulated market system with open entry and exit, market forces establish equilibrium prices and quantities. u While equilibrium conditions may be efficient, not everyone will be satisfied with the outcomes. Consumers Producers
Price Controls… u Are usually enacted when policymakers believe the market price is unfair to buyers or sellers. u Result in government-created price ceilings or price floors.
Price Ceiling and Price Floor Price Ceiling u A legally established maximum price at which a good can be sold. Price Floor u A legally established minimum price at which a good can be sold.
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.
Price Ceiling that is NOT Binding $3 Quantity of Oranges lbs 0 Price of Oranges-lb 4 Demand Supply Equilibrium price Price ceiling 100
Price Ceiling that IS Binding $3 Quantity of Oranges-lbs 0 Price of Oranges-lb 2 Demand Supply Equilibrium price Price ceiling Shortage 125 Quantity demanded 75 Quantity supplied
Effects of Price Ceiling A binding price ceiling creates… shortages because Q D > Q S u Gasoline shortage of the 1970s nonprice rationing u Long lines u Discrimination by sellers
Rationing Resources u Price Rationing Efficient Impersonal u 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
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.
Initially … Price ceiling Demand Supply Price of Gasoline Quantity ofGasoline 1. The price ceiling is not binding... P1P1 Q1Q1
Then … Price ceiling Demand S1S1 Price of Gasoline Quantity ofGasoline S2S2 2. supply falls... P2P2 QSQS QDQD P1P1 Q1Q the price ceiling becomes binding resulting in a shortage.
Rent Control u Rent controls are ceilings placed on the rents that landlords may charge tenants u Goal: to help the poor by making housing more affordable u New York City rent controls were enacted as a WWII emergency measure u Some units still under rent control today u Many rich tenants in rich neighborhoods paying low WWII prices.
Rent Control in the Long Run... Quantity of Apartments 0 Rental Price of Apartment Demand Supply Controlled rent Shortage