chapter six notes .docx - Chapter six Supply Demand and Government Policies 6-1 Controls on prices Price ceiling a legal maximum on the price at which a

chapter six notes .docx - Chapter six Supply Demand and...

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Chapter six: Supply, Demand, and Government Policies 6-1 Controls on prices Price ceiling: a legal maximum on the price at which a good can be sold at. Price floor: a legal minimum on the price at which a good can be sold from. 6-1 A: how price ceilings affect market outcomes The gov. imposes a price ceiling of $4 per ice cream cone. In this case, b/c the price that balances and demand ($3) is below the ceiling, the price ceiling is not binding . The gov. imposes a price ceiling of $2 per cone. b/c the equilibrium price of $3 is above the price ceiling, the ceiling is a binding constraint on the market. o The forces of supply and demand tend to move the price towards the equilibrium price, but when the market price hots the ceiling, it can rise no further. Hus, he market price equals the price ceiling When the gov. imposes a binding price ceiling on a competitive market, a shortage of the good arises, and sellers must ration the scarce goods among the large number of potential buyers. Price ceilings can cause shortages 6-1 B: how price floors affect market outcomes If the government imposes a price floor of $2 per cone when the equilibrium price is $3, because the equilibrium price is above the floor, the price floor is not binding. o Market forces naturally move the economy to the equilibrium, and the price floor has no effect. If the gov. imposes a price floor of $4 per come, b/c the equilibrium price of $3 is below the floor, the price floor is a binding constraint on the market. o The forces of supply and demand tend to move the price towards the equilibrium price, but when the market price hits the floor, it can fall no further. The market price equals the price floor. At this floor, the quantity of ice cream supplied (120 cones) exceeds the quantity demanded (80 cones). Thus, a binding price floor causes a surplus Price floors can cause surplus 6-1 C: evaluating price controls Prices are not the outcome of some haphazard process. Prices, they contend, are the result of the millions of business and consumer decisions that lie behind the surplus and demand curves.
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  • Fall '07
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