Price Ceilings & Floors

demand and supply model

shows how people and firms will react to the incentives provided by these laws to control prices, in ways that will often lead to undesirable consequences

Alternative policy tools

can often achieve the desired goals, while avoiding at least some of their costs and tradeoffs

Price Controls

are laws that the government enacts to regulate prices and they come in two flavors

Pirce Ceiling

keeps a price from rising above a certain level (“the ceiling”

Price Floor

keeps a price from falling below a certain level (“the floor”

Consumers

are potential votes, that sometimes unite behind a political proposal to hold down a certain price

Price Ceilings EX

In Albany, renters have pressed political leaders to pass rent control laws. This shows that a price ceiling that usually works by stating that rents can be raised by only a certain maximum percentage each year.

Price Floor

Is the lowest legal price that can be paid in markets for goods and services, labor, or financial capital

Price Floor EX

Minimum wage

Minimum Wage

is based on the normative view that someone working full time ought to be bale to afford a basic standard of living

Price Floors

Are also called “price supports” because they support a price by preventing it from falling below a certain level

Price Supports

is to prevent sings from happening that allows farm incomes to fluctuate widely.

Price Supports Cont

The most common way is the government entering the market and buys the product, adding to keep prices higher than they otherwise would be

Price Ceilings & Floors

sets a price that limits what can be legally charged in the market. They can cause a different choice of QD along a demand curve, but they don’t move the demand curve.

Price Controls Cont..

can cause a different choice of quantity supplied along a supply curve, but they don’t move the supply curve

Inefficient Outcome

the imposition of a price floor or ceiling will prevent a market from adjusting to its equilibrium price and quantity. There is also a transfer of some consumer surplus to produces and vice versa.

Inefficient Outcome

is the total surplus of society being reduced

Deadweight Loss

loss in social surplus that occurs when the economy produces at an inefficient quantity. Basically money being thrown away that benefits nobody.

Price Ceiling 2nd change

is that some of the producer surplus is transferred to consumers. In other words, the PC transfers the area of surplus (V) from producers to consumers

Alfred Marshall

is an famous economist that wrote asking if supply or demand determined a price was like arguing “whether it is the upper or the under blade of a pair of scissors that cuts a piece of paper”