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Price Controls
– government policies that attempt to hold the price at a disequilibrium
value.
If Q
d
≠ Q
s
, then the lesser of the two will be exchanged.
I.
Price Floors: a minimum permissible price.
A. Basic Outcome – a price floor is set above the equilibrium price or it will be
inconsequential.
P
S
P
f
P*
D
0
Q
d
f
Q*
Q
s
f
Q
Sellers would like to sell the amount Q
s
f
at the set price, but buyers are only willing to
purchase the amount Q
d
f
(it is this amount that is exchanged).
Q
s
exceeds Q
d
and the
price is not allowed to adjust to equate the two, so there is persistent excess supply.
This
is called a surplus.
Example:
the minimum wage
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P
a
S
P
f
b
P*
d
c
e
f
D
0
Q
d
f
Q*
Q
s
f
Q
CS without the price floor is the area bounded by aP*c
CS with the price floor is the area bounded by aP
f
b
The loss in CS is the area bounded by P
f
P*cb
PS without the price floor is the area bounded by P*fc
PS with the price floor is the area bounded by P
f
feb
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This note was uploaded on 11/13/2007 for the course ECON 2010 taught by Professor Mertens,wi during the Fall '07 term at Colorado.
 Fall '07
 MERTENS,WI
 Microeconomics

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