Post on 14-Dec-2015
Supply, Demand, and Government Policies In a free, unregulated market system, who or
what establishes Eq Q and Eq P?
Equilibrium conditions may be efficient, but…………..
Price Controls
Are usually enacted when policymakers believe the market price is unfair to buyers or sellers.
Price Ceilings & Price Floors
Price Ceiling A legally established maximum price at which a
good can be sold. Price Floor A legally established minimum price at which a
good can be sold.
A Price Ceiling That Is Binding
A Price Ceiling That Is Binding
$3
Quantity ofIce-Cream
Cones
0
Price ofIce-Cream
Cone
2
Demand
Supply
Equilibriumprice
A Price Ceiling That Is Binding
$3
Quantity ofIce-Cream
Cones
0
Price ofIce-Cream
Cone
2
Demand
Supply
Priceceiling
Equilibriumprice
A Price Ceiling That Is Binding
$3
Quantity ofIce-Cream
Cones
0
Price ofIce-Cream
Cone
2
Demand
Supply
Priceceiling
75Quantitysupplied
125Quantity
demanded
Equilibriumprice
A Price Ceiling That Is Binding
$3
Quantity ofIce-Cream
Cones
0
Price ofIce-Cream
Cone
2
Demand
Supply
Priceceiling
Shortage
75Quantitysupplied
125Quantity
demanded
Equilibriumprice
Effects of Price Ceilings
A binding price ceiling creates
. . . shortages because QD > QS
…. non-price rationing, long lines
A Price Floor That Is Binding
A Price Floor That Is Binding
$4
Quantity ofIce Cream
Cones
0
Price ofIce Cream
Cones
3
Demand
Supply
Equilibriumprice
A Price Floor That Is Binding
$4
Quantity ofIce Cream
Cones
0
Price ofIce Cream
Cones
3
Demand
Supply
Price floor
Equilibriumprice
A Price Floor That Is Binding
$4
Quantity ofIce Cream
Cones
0
Price ofIce Cream
Cones
3
Demand
Supply
Price floor
80Quantity
demanded
120QuantitySupplied
Equilibriumprice
A Price Floor That Is Binding
$4
Quantity ofIce Cream
Cones
0
Price ofIce Cream
Cones
3
Demand
Supply
Price floor
80Quantity
demanded
120QuantitySupplied
Equilibriumprice
Surplus
Effects of a Price Floor
A price floor prevents supply and demand from moving toward the equilibrium price and quantity.
When the market price hits the floor, it can fall no further, and the market price equals the floor price.
Effects of a Price Floor
A binding price floor causes . . .
. . . QS > QD.
Examples: The minimum wage
Agricultural price supports
In the figure shown, which panel(s) best represent(s) the situation in the U.S.during the period of price ceilings on gasoline in the 1970s?
a. panel (a)b. panel (b)c. both panel (a) and panel (b)d. neither panel (a) nor panel (b)
AP Micro AP Micro Sample Free Response Sample Free Response
Suppose the township of Hinsdale Suppose the township of Hinsdale introduces rent control. The introduces rent control. The maximum monthly rent for a two maximum monthly rent for a two bedroom apartment is fixed at $700 bedroom apartment is fixed at $700 a month. a month.
Identify two conditions for which this Identify two conditions for which this rent control law will have no effect rent control law will have no effect on the number of two bedroom on the number of two bedroom apartments available for rent.apartments available for rent.