Download Price Ceilings

Chapter 5
Extensions
of
Demand,
Supply,
and
Elasticity
Copyright © 2005 Pearson Education Canada Inc.
5-1
Learning Objectives
5.1 Explain the role of markets,
intermediaries, and prices in the price
system.
5.2 Compare and contrast price ceiling
and price floor policies.
5.3 Compare and contrast the offer-topurchase and the marketing board price
support policies.
Copyright © 2005 Pearson Education Canada Inc.
5-2
Learning Objectives
5.4 Describe the various types of
quantity restrictions that governments
can impose on markets.
5.5 Explain how price elasticity governs
the effects that a per-unit excise tax has
on tax incidence, resource allocation,
and government tax revenue collected.
Copyright © 2005 Pearson Education Canada Inc.
5-3
The Price System
Price System (market system)
 An economic system that allocates
resources based on relative prices
determined by supply and demand.
 Prices signal what is relatively scarce and
relatively abundant.
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5-4
The Price System
Transaction Costs
 The costs associated with exchange.
 Examples
•
•
•
•
•
Price shopping
Determining quality
Determining reliability
Service availability
Cost of contracting
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5-5
The Price System
The Rationing Function of Prices
When surpluses and shortages exist price
adjusts to clear the market.
This adjustment is the rationing function
of price.
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5-6
The Price System
When prices cannot adjust non-price
rationing occurs




Rationing by queues
Rationing by lotteries
Rationing by coupons
Rationing by waiting
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5-7
Price Ceilings and Price Floors
Price Controls
 Government-mandated minimum
or maximum prices.
Price Ceiling
 A legal maximum price.
Price Floor
 A legal minimum price.
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5-8
Price Ceilings and Price Floors
Price Ceilings: The Case of Rent Controls
Price ceiling and black markets
 Price ceilings may prevent the equilibrium
price from being achieved if it is above
the ceiling price.
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5-9
Price Ceilings and Price Floors
Monthly Rent per Unit
S
Black market
$1000
Price
Ceilings: The
Case of Rent
Controls
Pe=$800
Price Ceiling
$650
Shortage
D
QS
Qe
QD
50,000
60,000
70,000
Quantity: Number of units per month
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Price Ceilings and Price Floors
Non-Price Rationing Devices
 All methods used to ration scarce goods
that are price-controlled.
Black Market
 A market in which price-controlled goods
are sold at an illegally high price.
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5-11
Price Ceilings and Price Floors
The functions of equilibrium rental prices
 Promotes the efficient maintenance
and construction of housing
 Allocates existing housing
 Rations the use of housing
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5-12
Price Ceilings and Price Floors
Discourages the construction of new
housing
Effects on the existing supply
of housing
 Property owners cannot recover costs
Rationing the current use of housing
 Reduces mobility
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5-13
Price Ceilings and Price Floors
Attempts at evading rent controls
 Forcing tenants to leave
 Tenants subletting apartments
 Housing courts
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5-14
Price Ceilings and Price Floors
Who gains and who loses
from rent controls?
 Losers
• Property owners
• Low-income individuals
 Benefits
• Upper-income professionals
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5-15
Price Ceilings and Price Floors
Wage Rate per Unit
800 Unemployed
A
B
C
S
Wm
We
Reduction
in quantity
of labour
demanded
Excess
quantity
supplied at
wage Wm
E
Increase in
quantity of
labour supplied
D
Qd
Qe
Qs
2000
2500
2800
Quantity of Labour per Time Period
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5-16
Price Supports: Offer to Purchase
and Marketing Boards
Price Supports: The Case of Agriculture
• Governments have implemented a
variety of price support policies to
combat lagging and variable farm
income.
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5-17
Price Supports: Offer to Purchase
and Marketing Boards
Offer to Purchase policy


A price floor policy reinforced by the
purchase of surplus output by the
government.
Consumers pay higher prices for the
product, and taxpayers purchase excess
surplus.
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5-18
Price Supports: Offer to Purchase
and Marketing Boards
Price per tonne
surplus
S
Price floor
= $700
A surplus of 3000
tonnes per year
will result in
order to keep the
price at $700
Pe= $500
D
14
15
17
Thousands of tonnes
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5-19
Price Supports: Offer to Purchase
and Marketing Boards
Marketing Boards
 A policy which allows producers to band
together to restrict total quantity supplied
by using quotas.
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5-20
Price Supports: Offer to Purchase
and Marketing Boards
Price per tonne
S
Market Board price
= $700
Price will rise
to $700 with
imposition of
a quota.
Pe= $500
D
14
15
17
Thousands of tonnes
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5-21
Price Supports: Offer to Purchase
and Marketing Boards
Who loses?
 Consumers pay more for the product.
 New producers must pay for purchasing
the quotas.
 Foreign producers cannot export to
Canada.
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5-22
Quantity Restrictions
Governments may also impose quantity
restrictions on a product
 Outright ban of a product
 Government licensing requirements
 Import quotas
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5-23
Elasticity and Excise Taxes
Excise Tax
 A tax imposed on a particular commodity
or service.
• E.g. gasoline, alcohol, cigarettes, hotel rooms
Tax Incidence
 The division of the burden of a tax
between the buyer and seller.
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5-24
Elasticity and Excise
Taxes
S
2
$70
S1
$65
$55
Supply will shift
up by $15 with
an excise tax of
$15.
Price per
carton
$50
D
14
15
17
Thousands of tonnes
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5-25
Elasticity and Excise Taxes
Elasticity and Tax Incidence
 When demand is elastic, sellers will bear
a greater portion of the tax burden.
 When supply is inelastic, buyers will bear
a greater portion of the tax burden.
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5-26