Ch 08 - CHAPTER OUTLINE Price Ceilings Rent...

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88CHAPTERDYNAMIC POWERPOINT™ SLIDES BY SOLINA LINDAHLPrice Ceilings and FloorsPrice Ceilings and FloorsCHAPTER OUTLINEPrice CeilingsRent Control (Optional Section)Arguments for Price ControlsUniversal Price ControlsPrice FloorsFor applications, click hereTo Try it! To Try it! questionsquestionsTo To VideoVideoSome good blogs and other sites to get the juices flowing:Food for ThoughtFood for Thought….SEE THE SEE THE INVISIBLEINVISIBLEHANDHANDSEE THE SEE THE INVISIBLEINVISIBLEHANDHANDIraq 2003: Gas prices are frozen at $.05 per gallon. A good idea?SEE THE SEE THE INVISIBLEINVISIBLEHANDHANDSEE THE SEE THE INVISIBLEINVISIBLEHANDHANDGetting in the way of the invisible hand? Distorted price signals cause resources to be misallocated.BACK TO Price CeilingsPolicy makers may respond to buyers’complaints that prices are “too high”by enacting price controls.A Price Ceiling A Price Ceiling is a maximum price allowed by law.Price ceilings limit the price sellers can charge for their goods to the maximum price.Prices cannot legally go higher than the ceiling.
BACK TO Price CeilingsPrice ceilings that involve a maximum price below the market price create five important effects.1.When prices are held below the market price shortages are created.1. Shortages2.Reduction in Product Quality3.Wasteful Lines and Other Costs of Search4.Loss of Gains from Trade5.Misallocation of ResourcesShortagesThe shortage The shortage = difference between the Qdand the Qs at the controlled price.The lower the controlled price relative to the market equilibrium price, the larger the shortage.BACK TO ShortagesPrice Ceilings Create ShortagesQuantityPriceSupplyDemandMarket EquilibriumShortageControlled Price (Ceiling)Qsuppliedat the Controlled PriceQdemandedat the Controlled PriceSEE THE SEE THE INVISIBLEINVISIBLEHANDHANDSEE THE SEE THE INVISIBLEINVISIBLEHANDHANDA shortage of vinyl in 1973 forced CapitolRecords to melt down slow sellers so theycould keep pressing Beatles’ albums.Take a lookTake a look…....Does it matter that chicken prices were subject to a price ceiling but their feed was not? Click on the picture for a short video (first 1:40 min of the clip)Why do you think farmers killed a million baby chickens in 1973?To nextTo nextVideoVideoBACK TO Reduction of Product Quality2.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.Sellers respond to this problem in two ways:Reduce qualityReduce service
BACK TO Wasteful Lines and Other Costs of Search3.Price controls that create shortages lead to bribery and wasteful lines.

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