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price ceiling
a legal maximum on the price sellers can charge for a good or service (usually set below the eq)
ex: rent control
price floor
a legal minimum on the price buyers are required to pay for a good or service ( usually above the eq)
ex: minimum wage
quantity controls (or quotas)
an upper limit on the quantity of some good that can be bought or sold
quota limit is the total amount that can be legally transacted
ex: rationing coupon books wwii
When is a price ceiling not binding?
above the equilibrium it is not binding and has no effect on the market outcome
When a price ceiling is binding?
When the price ceiling is below the equilibrium. This causes a shortage.
Why do price ceilings cause inefficiency?
Inefficiently low quality
inefficient allocation to customers
wasted resources, time and effort
inefficiently low quality
black markets
deadweight loss
loss due to the inefficiently low quantity transacted
wasted resources
price controls create shortages lead to bribery and wasteful lines
Price ceilings: if under eq prices will be so cheap everyone can buy causing shortage
shortages: not all buyers will be able to purchase the good
normally buyers would compete with each other by offering a higher price
if price is not allowed to rise. buyers must compete in other ways (waiting in line, illegal bribes and favors”
Inefficiency low quality apartment example
at the controlled price, sellers have more customers than goods.
in a free market, this would be an opportunity to profit by raising prices
but when prices are controlled sellers cannot… this causes
reduction in quality and service
black market
is a market in which goods or service are bought and sold illegally- either because they are prohibited or because eq price is illegal
when is a price floor binding?
when it is above the the equilibrium price, this creates a surplus
ex: labor surplus
do price floors and ceilings shift the supply or demand curve?
No they do not shift the supply or demand curve.
how price floors cause inefficiency
inefficient allocation: 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: surplus production is sometimes destroyed-to deal w surplus from dairy price floors the U.S govt buys excess back
wasted time n effort looking for jobs
inefficiency high quality: people wanted lower fares instead got expensive services (fancy meals etc)
price floors encourage black markets
there are willing sellers and buyers at illegal prices so they are temped to break the law and trade w eachother
quota
an upper limit set by the government on the quantity of some goof that can be bought or sold; also referred to as a quantity control
license
the right, conferred by the gov’t to supply a good
demand price
the price of a given quantity at which consumers will demand the quantity
supply price
the price of a given quantity at which producers will supply that quantity
all controls create…
deadweight loss
price ceilings, price floors, quotas all decrease rge amount traded and therefore create deadweight loss
a price ceiling pushes the price of a good down; fewer sellers want to sell
a price floor pushes the price of the good up; fewer buyers want to buy
a quota by definition reduces sales
PRICE FLOORS ABOVE EQ LEADS TO
SURPLUS
PRICE CEILING BELOW EQ LEADS TO
SHORTAGE
Note 
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