Supply and Demand: Price Controls (Ceilings and Floors Module 8 Feb 2015

Government Controls There is often a strong political demand for governments to intervene in markets Price Controls-When a government intervenes to regular prices These come in the form of an upper limit and a lower limit – known respectively as a price ceiling and a price floor. We will assume markets are efficient before price controls are imposed.

Price Ceilings Typically imposed during crises – war, shortages, etc. When price ceilings are imposed that are below equilibrium, the supplier might choose to offer fewer goods And the demand for that good would increase, creating a shortage If the price ceiling is above equilibrium, it won’t have any effect Inefficient allocation to consumers is when those who really need something, cannot get it, while those who don’t necessarily need it, do get it. Wasted resources – inefficiency by people expending money, effort, and time to cope with the shortages caused by the price ceiling.

Price Ceilings Inefficiently low quality – sellers offer low quality good at a low price even though buyers would prefer a higher quality at a higher price Black Markets – a market in which goods or services are bought and sold illegally – either because it is illegal to sell them at all or because the prices charged are legally prohibited by a price ceiling Problems: A persistent shortage of a good Inefficiency arising from this persistent shortage in the form of inefficiently low quantity, inefficient allocation of the good to consumers, resources wasted and inefficiently low quality of goods Emergence of illegal, black market activity

Price Floors Minimum wage – a floor or lowest limit on the price of labor When price floors are imposed that are above equilibrium, the supplier might choose to offer more goods And the demand for that good would decrease, creating a surplus If the price ceiling is below equilibrium, it won’t have any effect In the case of agricultural surpluses, the government picks up the surplus At times, the government will pay farmers NOT to produce For minimum wage, those workers may not be able to find employment because the employers don’t want to pay the additional wages

Price Floors Inefficiently low quantity – because a price floor raises the price of a good, the supply demanded would decrease, and a seller may choose not to produce as much. This is the same effect on ceilings and floors – a decrease in quantity supplied Inefficient allocation of sales among sellers – those who would be willing to sell the good at the lowest price are not always those who manage to sell it Wasted resources – purchases of surplus by the government, wasted time and effort Inefficiently high quality – sellers offer high-quality goods at a high price, even though buyers would prefer a lower quality at a lower price

Price Floors Negative side effects: A persistent surplus of goods Inefficiency arising from the persistent surplus in the form of inefficiently low quantity, inefficient allocation of sales among sellers, wasted resources, and an inefficiently high level of quality offered by suppliers Illegal activity – bribery, corruption of gov’t officials, working “under the table”

Review Do Module 8 Questions Review answers with teacher Complete Units 1 and 2 in the AP Economics workbook Using Barron’s workbook handouts, complete questions on pages 20-22, 34- 37, 51-52, and 70 Using Krugman’s exercises, do comparative advantage and trade exercise Breathe….You have until Wednesday to get everything done before class. But, you will be facing a test that day.