Presentation on theme: "Price Controls: Ceilings and Floors"— Presentation transcript:
1 Price Controls: Ceilings and Floors AP EconomicsMr. BernsteinModule 8:Price Controls: Ceilings and FloorsOctober x, 2013
2 AP Economics Mr. Bernstein Price ControlsA legal restriction on how high or low a market price may goEnacted by governments in response to political pressures from buyers and sellers
3 AP Economics Mr. Bernstein Price CeilingsExamplesResources during WWIINew York City apartments (rent control)Food prices in VenezuelaSalary Caps in Major League SportsCredit Card interest rate capsWhere would you like to see price ceilings?
4 AP Economics Mr. Bernstein Modeling a $2 Price Ceiling on TacosQd ~= 6Qs~= 4Shortage = 2Who benefits?Notice the priceceiling is belowequilibrium ona graph
5 AP Economics Mr. Bernstein Inefficiencies of a $2 Price Ceiling on TacosInefficient Allocation to ConsumersSome willing to pay $5 get none, some unwilling to pay $5 will be able to buy at $2Wasted ResourcesConsumers spend time and other scarce resources chasing shortages (incurring opportunity costs)Lower Quality ProductsBlack Markets
6 AP Economics Mr. Bernstein Why do Price Ceilings Exist?They do benefit some consumers!Those with political clout gainOnce in place, there is uncertainty about removal effectsGovernment officials may not understand supply and demand effects
7 AP Economics Mr. Bernstein Price FloorsExamplesMinimum WageAgricultural Products
8 AP Economics Mr. Bernstein Modeling a Price Floor on TacosExcess SupplyNotice the pricefloor is aboveequilibrium priceon a graph!
9 AP Economics Mr. Bernstein Inefficiencies of a Price FloorQuantity Demanded falls due to price increaseQuantity bought and sold falls, creating TU loss to societyProducers willing to sell at equilibrium price may not be the ones lucky enough to make salesInefficiently high quality productsWasted ResourcesProducers may begin adding extravagant ingredients not even desired by buyers in market in equilibriumIllegal activityie working below minimum wage due to surplus labor supplyEncourages bribery and corruption of government officials
10 AP Economics Mr. Bernstein Why do Price Floors Exist?They do benefit some producers!Those with political clout gainOnce in place, there is uncertainty about removal effectsGovernment officials may not understand supply and demand effects
11 AP Economics Mr. Bernstein Defining Deadweight Loss“Losses associated with quantities of output that are greater than or less than the efficient level, as can result from market intervention such as taxes, or from externalities such as pollution.” Krugman
12 AP Economics Mr. Bernstein Defining Deadweight Loss: Price Floors
13 AP Economics Mr. Bernstein Defining Deadweight Loss: Price Ceilings