想 Supply, Demand and HEL Government Policies Cha later 6 Copyright o 2001 by Harcourt, Inc All rights reserved. Requests for permission to make copies of any part of the work should be mailed to Permissions Department, Harcourt College Publishers 6277 Sea harbor Drive. Orlando Florida 32887-6777
Supply, Demand and Government Policies Chapter 6 Copyright © 2001 by Harcourt, Inc. All rights reserved. Requests for permission to make copies of any part of the work should be mailed to: Permissions Department, Harcourt College Publishers, 6277 Sea Harbor Drive, Orlando, Florida 32887-6777
Supply, Demand, and Government policies In a free, unregulated market system, market forces establish equilibrium prices and exchange quantities While equilibrium conditions may be efficient, it may be true that not everyone is satisfied One of the roles of economists is to use their theories to assist in the development of pe olicies. Harcourt, Inc. items and derived items copyright o 200l by harcourt, Inc
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Supply, Demand, and Government Policies In a free, unregulated market system, market forces establish equilibrium prices and exchange quantities. While equilibrium conditions may be efficient, it may be true that not everyone is satisfied. One of the roles of economists is to use their theories to assist in the development of policies
Price Controls Are usually enacted when policymakers believe the market price is unfair to buyers or sellers. Result in government-created price ceilings and floors Harcourt, Inc. items and derived items copyright o 200l by harcourt, Inc
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Price Controls... Are usually enacted when policymakers believe the market price is unfair to buyers or sellers. Result in government-created price ceilings and floors
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. Harcourt, Inc. items and derived items copyright o 200l by harcourt, Inc
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. 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
Price Ceilings Two outcomes are possible when the government imposes a price ceiling: The price ceiling is not binding if set above the equilibrium price. The price ceiling is binding if set below the equilibrium price, leading to a shortage. Harcourt, Inc. items and derived items copyright o 200l by harcourt, Inc
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Price Ceilings Two outcomes are possible when the government imposes a price ceiling: The price ceiling is not binding if set above the equilibrium price. The price ceiling is binding if set below the equilibrium price, leading to a shortage
Harcourt, Inc. items and derived items copyright C 2001 by Harcourt, Inc A Price Ceiling That Is Not Binding ■■■ Price of Ice Cream Cone Supply $4 Price ceiling 3 Equilibrium price ■■■■■ Demand 100 Quantity of Equilibrium Ice-Cream quantit Cones
A Price Ceiling That Is Not Binding... $4 3 Quantity of Ice-Cream Cones 0 Price of Ice-Cream Cone Demand Supply Price ceiling Equilibrium price 100 Equilibrium quantity Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc
Harcourt, Inc. items and derived items copyright C 2001 by Harcourt, Inc A Price Ceiling That Is Binding Price of Ice-Cream Cone Supply Equilibrium price $3 Price eiling Shortage Demand 75 125 Quantity of Quantity Quantity Ice-Cream supplied demanded Cones
A Price Ceiling That Is Binding... $3 Quantity of Ice-Cream Cones 0 Price of Ice-Cream Cone 2 Demand Supply Equilibrium price Price ceiling Shortage 125 Quantity demanded 75 Quantity supplied Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc
Effects of Price Ceilings a binding price ceiling creates shortages because Lp>2s Example: Gasoline shortage of the 1970s nonprice rationing Examples: Long lines, Discrimination by sellers Harcourt, Inc. items and derived items copyright o 200l by harcourt, Inc
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Effects of Price Ceilings A binding price ceiling creates ... shortages because QD > QS . Example: Gasoline shortage of the 1970s nonprice rationing Examples: Long lines, Discrimination by sellers
Lines at the Gas Pump In 1973 OPEC raised the price of crude oil in world markets. Because crude oil is the major input used to make gasoline, the higher oil prices reduced the supply of gasoline. What was responsible for the long gas li nes Economists blame government regulations that limited the price oi companies could charge for gasoline. Harcourt, Inc. items and derived items copyright o 200l by harcourt, Inc
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Lines at the Gas Pump In 1973 OPEC raised the price of crude oil in world markets. Because crude oil is the major input used to make gasoline, the higher oil prices reduced the supply of gasoline. What was responsible for the long gas lines? Economists blame government regulations that limited the price oil companies could charge for gasoline
The Price Ceiling on Gasoline Is Not Binding ■ Price of Gasoline Initially the Supply price celling is not bindinga 4 Pr rce ceiling ■■■■■ Demand Q1 Quantity of Gasoline Harcourt, Inc. items and derived items copyright o 200l by harcourt, Inc
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. The Price Ceiling on Gasoline Is Not Binding... $4 P1 Quantity of Gasoline 0 Price of Gasoline Q1 Demand Supply Price ceiling 1. Initially, the price ceiling is not binding