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Price Controls government regulations to set either a maximum or minimum price for a product Price Ceiling a government regulation stipulating the maximum.

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Presentation on theme: "Price Controls government regulations to set either a maximum or minimum price for a product Price Ceiling a government regulation stipulating the maximum."— Presentation transcript:

1 Price Controls government regulations to set either a maximum or minimum price for a product Price Ceiling a government regulation stipulating the maximum price that can be charged for a product Price Floor a government regulation stipulating the minimum price that can be charged for a product 3-1© 2012 McGraw-Hill Ryerson Limited LO3

2 Price Ceiling Used when present market price for a particular product is considered too high for many buyers The product is felt to be a necessity Example: rent control 3-2© 2012 McGraw-Hill Ryerson Limited LO3

3 Price Ceiling Price ceilings cause shortages 3-3© 2012 McGraw-Hill Ryerson Limited LO3

4 Allocating Shortages The market (supply and demand) First come, first served Producers preferences Rationing 3-4© 2012 McGraw-Hill Ryerson Limited LO3

5 a)Suppose the government introduces a price ceiling that is 20 cents different from the present equilibrium price. Would the result be a surplus or a shortage? Of what quantity? b)If an illegal market were to develop, what would be the maximum illegal market price? Self-Test 3-5© 2012 McGraw-Hill Ryerson Limited LO3

6 Quota A quota, or restricting output, can raise price without causing a surplus 3-6© 2012 McGraw-Hill Ryerson Limited LO3

7 a)In equilibrium, what is the total revenue received by producers? b)Suppose that government imposes a price floor of $4 per kilo. What quantity will be demanded? What quantity will farmers produce? What quantity will government buy? c)How much will it cost to buy the surplus? Self-Test 3-7© 2012 McGraw-Hill Ryerson Limited LO3


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