Econ Unit 3a

What is a price ceiling?

It is the maximum legally allowable price sellers can charge.

What makes a price ceiling effective?

It caps a price below equilibrium because EP was deemed too high; must be placed below equilibrium.

What are some price ceiling consequences?

1. Persistent shortage
2. Increased allocation of product to buyers
3. Degradation in quality
4. Black markets

What is a price floor?

It is the minimum legally allowable price sellers can offer.

What makes a price floor effective?

It props a price up above equilibrium because EP was deemed too low; must be placed above equilibrium.

What will happen to the market if a price floor is placed below equilibrium?

The market will still choose the EP according to the law of market forces.

What is the law of market forces?

When the price is too high, the subsequent surplus pushes the price down, toward equilibrium; and when the price is too low, the subsequent shortage pushes the price up, toward equilibrium.

How can individual CS be calculated?

Willingness To Pay - Price Paid

How is total CS calculated?

1. Add all individual CS
2. Area of triangle on an equilibrium graph

How is individual PS calculated?

Willingness To Sell - Price Sold

How is total PS calculated?

1. Add all individual PS
2. Area of triangle of an equilibrium graph

What happens to CS when S changes?

If supply shifts to the right:
• CS increases
If supply shifts to the left:
• CS decreases

What happens to PS when D changes?

If demand shifts to the right:
• PS increases
If demand shifts to the left:
• PS decreases

What happens to CS and PS with a price ceiling?

1. PS increases
2. CS might increase or decrease

What happens to CS and PS with a price floor?

1. CS decreases
2. PS might increase or decrease