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Price Controls & Black Market Economies Price Controls • Why Implement Price Controls? – The government feels that the forces of supply and demand are resulting in equilibrium prices that are either: • Unfairly high for buyers • Unfairly low for sellers • Equilibrium Price - The price where the quantity demanded and the quantity supplied are equal. Price Controls cont. • Price Ceilings - The maximum legal price a seller can charge for a good that is below equilibrium price. – Rationale - Allows consumers to obtain some “essential” good/service that they would not otherwise be able to afford at the equilibrium price. – Ex. Rent Control • Price Floors - A minimum price established by the government that is above the equilibrium price. – Ex. Minimum wage What is a black market? • Black Markets - A market consisting of all commerce on which applicable taxes or regulations are avoided. – A black market can consist of either… • Legal goods sold at illegal prices • Illegal goods How do price ceilings lead to black markets? • Effects of Price Ceilings: – Demand by consumers will increase; – Seller’s profits decrease; – In order to maximize profits, sellers will reduce supply; – Shortages result; – Consumers who are willing and able to pay a higher price for the good will find a way to obtain it on the black market. Black Markets cont… • How do black markets affect the supply of goods? – Consumers who are willing/able to pay will move into the black market; – Demand for the good will increase along with the black market price; – Sellers will divert more of the product onto the black market in order to make more money; – Shortages will be exacerbated in the legal market.