Chapter 4 Market Equilibrium and Elasticity
Chapter 4 Market Equilibrium and Elasticity
Price controls a Legal restrictions on how high or low a market price may go Price Ceiling limiting price (on consumer goods to protect consumers welfare) maximum price a seller can charge ■ Price f|oor: support price(on production factors, e. g labor minimum price a buyer is required to pay
Price Controls ◼ Legal restrictions on how high or low a market price may go ◼ Price Ceiling: – limiting price (on consumer goods to protect consumers welfare) – maximum price a seller can charge ◼ Price Floor: – support price (on production factors, e.g. labor) – minimum price a buyer is required to pay
Example: Price Ceiling Monthly rent (per apartment) Quantity of apartments (millions) 1400 Monthly rent Quantity Quantity 1300 (per apartment) demanded supplied 1.200 2.4 1.100 1.200 2.2 1.100 1.000 1.000 2.0 2.0 900 900 800 2.2 1.8 700 2.3 2.4 1.6 700 600 1.61.7181.92.02.12.22.32.4 Quantity of apartments(millions)
Example: Price Ceiling
The Effects of a Price Ceiling Month ly rent (per apartment) $1,400 S 200 1,000 Price A ceiling B 800 Housing shortage 600 of400.000 apartments caused D by price ceiling 1.6 1.8 2.0 2.2 2.4 Quantity of apartments(millions)
The Effects of a Price Ceiling
Example: Rent controls Figure 3.8, P70 Supply 2400 1,600 Excess demand 2 million apartments/month Controlled rent =800 Demand 2 Quantity(millions of apartments/day)
Figure 3.8,P.70 Example: Rent Controls
Example: Assumed Price Controls in the pizza market Figure 3. 9 upply Excess demand=8000 slices/day o Price ceiling=2 Demand 81216 uantity(,000s of slices/day
Figure 3.9 Example: Assumed Price Controls in the Pizza Market
Problems with Price ceilings Shortages Inefficiencies misallocation to consumers wasted resources low quality black markets
Problems with Price Ceilings ◼ Shortages ◼ Inefficiencies – misallocation to consumers – wasted resources – low quality ◼ black markets
Example: Price Floor of butter (per pound Quantity of butte (millions of pounds) $1.40 Price of butter Quantity Quantity 1.30 (per pound) demanded supplied 1.20 1.40 8.0 14.0 1.30 85 13.0 1.10 1.20 9.0 12.0 1.10 95 11 1.00 1.00 10.0 10.0 0.90 10.5 9.0 0.90 0.80 11.0 8.0 0.80 0.70 7.0 0.60 12.0 60 0.70 0.60 607.08090100110120130140 Quantity of butter(millions of pounds)
Example: Price Floor
The effects of a price floor Price of butter (per pound) Butter surp/us of $1.40 3 million p caused by price floor 1.20 A: Price floor 1.00 0.80 0.60 D 6.0 8.09.010.0 12.0 14.0 Quantity of butter(millions of pounds)
The Effects of a Price Floor
Problems with price floors ■Surp|us Inefficiencies misallocation of sales among sellers Wasted resources Inefficiently high quality a llegal activity
Problems with Price Floors ◼ Surplus ◼ Inefficiencies – misallocation of sales among sellers – Wasted resources – Inefficiently high quality ◼ Illegal activity