Download Price Floors and Ceilings

InterferenceWithMarketPrices
Thus far, we have used the supply (S) and demand (D) model
in situations in which the price (P) is freely determined without
government control, called freely determined prices. But many
times throughout history, and around the world today,
governments have attempted to control market prices, ref erred
to as price controls. In socialist and communist countries, the
government controls the economy and makes the decisions.
Engel's Law, named after the revolutionary that worked
closely with Karl Marx in Russia in the 1800's, was based on
the idea that proportional taxes are regressive since the poorer
you are the higher percentage of your income you pay on
necessities. Someone earning $39,000 a year pays a larger
percentage of their income towards necessities and therefore
more taxes vs. someone who earns $66,000.
Page1
PriceCeilingsand PriceFloors
In general, there are two broad types of government price (P)
controls. Controls can stipulate a price ceiling , or a maximum
price at which a good can be bought and sold. Some cities in
the U.S. have price controls on rental apartments. Landlords
are not permitted to charge a rent higher than the maximum
stipulated by the rent control law in these cities. Government
price controls can also stipulate a price floor , or a minimum
price at which a good can be bought and sold. The U.S.
government requires that firms pay workers a wage (W) of at
least a given level, called the minimum wage. The most
desired wage is the equilibrium wage(We),which is the wage
for workers that equates demand and supply; the wage that
produces neither an excess supply of workers nor an excess
demand of workers in the labor market.
Page2
Shortagesand ProblemsResultingfromPriceCeilings
If the government prevents firms from charging more than a
certain amount for their products by setting a price (P) ceiling,
then a shortage is likely to result in the market. The product
will be more expensive and less consumers will be able to
purchase it.
Page3
Shortagesand ProblemsResultingfromPriceCeilings
(cont.)
If the ceiling is set below the equilibirum price, the ceiling is
binding, or mandatory. But if the ceiling is set above the
equilibrium price, then the ceiling does not matter since the
ceiling is above the equilibrium price. The equilibrium price
(Pe) will stay the same.
A Market
Price
A Binding Price Ceiling
Supply (S)
Market
equilibrium (Me)
Equilibrium
price (Pe) "-
1
- - - - - - - - - - - - - - - - - - --- ---
. /'
.
quantity supplied
(Qs)
Page4
/'
Quantity
quantity demanded
(Qd)
Surplusesand ProblemsResultingfromPriceFloors
If the government imposes a price (P) floor, then a surplus will
occur because not as many consumers will be able to afford the
higher price. The product will be cheaper and more consumers
will be able to purchase it.
Page5
Surplusesand ProblemsResultingfromPriceFloors
(cont.)
If the floor is set above the equilibirum price, the floor is
binding. But if the floor is set below the equilibrium price,
then the floor does not matter since the floor is below the
equilibrium price. The equilibrium price (Pe) will stay the
A Market
same.
Price
A Binding Price Floor
binding price floor/
mimimum price
Surplus©
Supply (S)
Equilibrium
price (Pe) ...., ...
Market
equilibrium (M e)
Demand (D)
quantityiemanded
(Qd)
Page6
quantity (..pplied
(Qs)
Quantity
Surplusesand ProblemsResultingfromPriceFloorsQuestions
2. If an ffective r nl ceiling is eli1ninated which of
the following i n1 0 t likely to occur in the rental
housing 1narket?
(A) An increa e in the de1nand for hou ing
resulting in a decrease in the quantity of
housing supplied
(B) An increa e in r nts, re ulting in an increa e
in th quantity of hou ing upplied
(C) An increase in the dernand for housing ..
resulting in an increase in the quantity of
hou ing demanded
(D) A decrea e in rent , re ulting in an increa e in
the quantity of housing supplied
(E) A decrea e in the dernand for hou ing,
re ulting in an increa in the quantity of
hou ing supplied
Page7
Surplusesand ProblemsResultingfromPriceFloorsQuestions
2. If an ffective r nl ceiling is eli1ninated which of
the following i n1 0 t likely to occur in the rental
housing 1narket?
(A) An increa e in the de1nand for hou ing
resulting in a decrease in the quantity of
housing supplied
• An increa e in r nts, re ulting in an increa e
in th quantity of hou ing upplied
(C) An increase in the dernand for housing ..
resulting in an increase in the quantity of
hou ing demanded
(D) A decrea e in rent , re ulting in an increa e in
the quantity of housing supplied
(E) A decrea e in the dernand for hou ing,
re ulting in an increa in the quantity of
hou ing supplied
Page8
Surplusesand ProblemsResultingfromPriceFloorsQuestions
Price per
Quantity
Quantity
Gallon
Suppli ed
Detnand ed
$2 .50
$2 .75
$3. 00
$3.25
$3.50
$3.75
11,000
12, 000
13,000
14,000
15,000
16,000
17,000
16,000
15,000
14,000
13,000
12,000
3. The table above show the quantity of gasolin e
suppli ed and demand ed at variou prices in a
country . If the goverrunent sets a price floor of
$2. 7 5 on a gallon of gasolin e, what is the pri ce per
gallon ?
(A)
(B)
(C)
(D)
(E)
Page9
$2.75
$3 .00
$3 .25
$3 .50
$3 .75
Surplusesand ProblemsResultingfromPriceFloorsQuestions
Price per
Quantity
Quantity
Gallon
Suppli ed
Detnand ed
$2 .50
$2 .75
$3. 00
$3.25
$3.50
$3.75
11,000
12, 000
13,000
14,000
15,000
16,000
17,000
16,000
15,000
14,000
13,000
12,000
3. The table above show the quantity of gasolin e
suppli ed and demand ed at variou prices in a
country . If the goverrunent sets a price floor of
$2. 7 5 on a gallon of gasolin e, what is the pri ce per
gallon ?
(A)
(B)
•
(D)
(E)
Page10
$2.75
$3 .00
$3 .25
$3 .50
$3 .75
Surplusesand ProblemsResultingfromPriceFloorsQuestions
Supply
$2, 000 ---------
Demand
0
QUANTITY
33. Th e diagram abo ve d epicts demand and supply
c urve in a city ' rental hou sing market. If a price
ce ilin g of $ 1,000 i impo se d on th e mark et, which
of the following will occur?
(A) Ther e will be a surplu s of rental hou in g in
th e c ity.
( B ) Th e demand cur ve for hou si ng will shift to
the right .
(C) Th e supply c urv e for hou sin g will shift to the
right .
(D ) The quantity of rental housin g uppli ed will
dec rease.
(E) Th e qu antity of rental hou si ng de m a nd ed will
mcrease.
Page11
Surplusesand ProblemsResultingfromPriceFloorsQuestions
Supply
$2, 000 ---------
Demand
0
QUANTITY
33. Th e diagram abo ve d epicts demand and supply
c urve in a city ' rental hou sing market. If a price
ce ilin g of $ 1,000 i impo se d on th e mark et, which
of the following will occur?
(A) Ther e will be a surplu s of rental hou in g in
th e c ity.
( B ) Th e demand cur ve for hou si ng will shift to
the right .
(C) Th e supply c urv e for hou sin g will shift to the
right .
(D ) The quantity of rental housin g uppli ed will
dec rease .
•
Th e qu antity of re ntal hou si ng de m a nd ed will
mcrease.
Page12
Surplusesand ProblemsResultingfrom Price FloorsQuestions
6. If a governrnent elimi11at
ed an effe tive price floor
in a market, all of tl1e following would occur
EXCEPT:
(A
(B
(C
(D
(E
Page13
The urplu wottld be eliminated.
Tl1e price would decrea e.
The qt1antity upplied wou ld decrea e.
Tl1e quantity dernanded would increa e.
Tl1e upply of tl1egood \.\rould increa e.
Surplusesand ProblemsResultingfrom Price FloorsQuestions
6. If a governrnent elimi11at
ed an effe tive price floor
in a market, all of tl1e following would occur
EXCEPT:
(A
(B
(C
(D
•
Page14
The urplu wottld be eliminated.
Tl1e price would decrea e.
The qt1antity upplied wou ld decrea e.
Tl1e quantity dernanded would increa e.
Tl1e upply of tl1egood \.\rould increa e.