HarrisonTMBA5130-8

# HarrisonTMBA5130-8 - Price Ceiling For a one bedroom rental...

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Price Ceiling For a one bedroom rental units, the Demand Function is QD = 120- 4P, and Supply function is QS = 2P, where QD and QS stand for quantity demanded and quantity supplied respectively. The table below represents the price values picked randomly to compute demand and supply functions: Price (USD) Demand (QD) Supply (QD) 10 80 20 12 72 24 16 56 32 17 52 34 20 40 40 24 24 48 28 8 56 Fig 1. Demand and Supply curves (Rental Units) The Equilibrium Price (PE) is \$20, and Quantity at PE is 40 units (QE) as shown in the above graph.

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HarrisonTMBA5130-8 2 Impact of Introducing Price Ceiling on Demand and Supply In the case of the City Council in Prescott, AZ introduces a price ceiling (P1) lower than the Equilibrium Price (PE), as indicated in Fig 2. It will result in increased demand from QE to QD, resulting in a shortage of supply from QE to QS, as shown below. During normal circumstances, increased demand will lead to pushing prices upwards. For example, consider that the consumer is willing to pay price P2 for QS, there is deadweight welfare loss for rent controlled housing (as depicted by the grey area in Fig. 2). Without the price ceiling, suppliers have greater incentive to increase quantity due to rise in demand, leading to rising prices. In the given case, the prices cannot go past P1 that is \$16, as it is the maximum price. Thus, the shortage leads to rationing of units available, and the price ceiling ensures that price is not a factor in the allotment process. Additionally, quality of the unit deteriorates, as suppliers do not have the incentive of maintaining quality at low prices. Fig 2. Price Ceiling (Maximum) S
HarrisonTMBA5130-8 3 Effects of Price Ceiling for Prescott Consumers The price ceiling will have an effect on the market if it is set below the price of market equilibrium. In this case, the ceiling price is \$16, and the equilibrium price is \$20. Consequently,

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