CH5: price controls & Quotas

price ceiling

the highest price you can charge in a market

example of price ceiling

rent control

price floor

the minimum price that can be charged in the market

price floor example

minimum wage laws

quantity controls

limit on the quantity of some good that can be bought or sold

quantity controls

rationing book saying how much you are allowed to buy

think of the example of the market for apartments.

you have 250 apartments but 400 ppl want to rent. (this at the quantity X-axis)

the equilibrium is 300 apt at $800

where is the shortage?

from 250-400

if the price ceiling is above the equilibrium is it binding?

no, it has no effect on the market.

if the price ceiling is below the equilibrium is it binding?

yes, it restricts the market causing a shortage

if the price ceiling is below the equilibrium what does it mean?

it means its illegal because the price cannot rise to the equilibrium level, thus causing a shortage.

price ceilings cause inefficiency because

inefficient allocation to customers (when ppl get apts and others don’t)

inefficiently low quality

landlords dont take care of apt bc there is rent control

black markets

landlords get money on the side

deadweight loss

lost opportunities where both buyer and sellers wouldve been happy but a market interference (like price cielings) stop the deal from happening.

where is dead weight loss?

the triangle in front of CS and PS

how to calculate deadweight loss?

b*h*1/2 of the triangle created from price controls

before rent control (price cieling)

there is only PS and CS on graph

In therms of wages if the price floor is $5 is above equilibrium $4 which means

it is binding bc it is illegal due to the law to pay below that price.

causing unemployment due to the surplus

will be on exam: price floor leads to

how to calculate it?

Subtract the number on the point that meets Supply and price floor MINUS the point where demand and price floor meet to get the quantity

how price floor causes inefficiency

inefficient allocation of sales among sellers

• means those who would be willing to sell the good at the lowest price are not always those who actually manage to sell it

wasted resources bc of price floor why?

surplus production is sometimes destroyed

ex= government buyouts (milk) or disposal of excess stock.

inefficiently high quality

sellers offer hugh quality goods at a higher price, even though buyers would prefer lower quality goods at a lower price.

Temptation to break the law

selling below the legal price

to find the fall in employment you **** think of graph*****

do equilibrium point on the x-axis MINUS point that demands meets minimum wage

to find unemployment you **** think of graph*****

do point where demand meets minimum wage MINUS where supply meets minimum wage

quota

a limit set by the government on the quantity of some good that can be bouhgt or sold also called quantity control

license

the legal right to supply a good

a quota by definition reduces ?

sales

a ceiling pushes the price of a good down and

fewer sellers will want to sell

a price floor pushed the price of a good up and

fewer buyers will want to buy

if sellers don’t want to sell as much as buyers want to buy, who determines the quantity sold?

sellers because buyers cant force unwilling sellers to sell

if buyers dont want to buy as much as sellers want to sell who determines quantity sold?

buyers because sellers cant force unwilling buyers to buy.