Economics 101Chapter08

Economics 101Chapter08 - 1 Objectives for Chapter 8 Price...

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Objectives for Chapter 8 Price Floors and Ceilings At the end of Chapter 8, you will be able to: 1. Define “price ceiling” and draw it on the demand – supply graph. 2. Gives some examples of price ceilings. 3. Analyze the results of price ceilings. 4. Explain how goods and services are rationed if there is a price ceiling. 5. Define “black market” and “gray market” . 6. Use the analysis of price ceilings to analyze the problem relating to water in California. 7. Define “price floor” and draw it on the demand – supply graph. 8. Give some examples of price floors. 9. Analyze what results if there are price floors. 10. Analyze the results of the price support program for agriculture. Chapter 8 Price Ceilings and Floors (latest revision May 2006) We have been considering the way markets work under normal conditions. Sometimes, markets are not allowed to work. This means that the price is not allowed to move to the equilibrium level. Two such conditions are price ceilings and price floors . Let us begin with price ceilings. 1. Price Ceilings One interference with the market process is called a price ceiling. A price ceiling occurs when the price is artificially held below the equilibrium price and is not allowed to rise . There are many examples of price ceilings. Most price ceilings involve the government in some way. For example, in many cities, there are rent controls . This means that the maximum rent that can be charged is set by a governmental agency. This rent is usually allowed to rise a certain percent each year to keep up with inflation. However, the rent is below the equilibrium rent. Also, from 1973 to 1981, there was a price ceiling for gasoline. There was a maximum price allowed by law. Any gas station owner charging more than this maximum price would be guilty of fraud. During World War II, there were price ceilings on most products. Occasionally, price ceilings are imposed by the seller . For example, when the Chargers played in the playoffs, they sold about 65,000 seats. There was demand for at least twice that many. Nothing prevented the Chargers from raising the price to whatever the market would bear. But they chose not to do so. 1
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In the graph below, assume that the equilibrium price is $3.00 per gallon of gasoline. The maximum price is set by the government at $1.50 per gallon. At the price of $1.50 per gallon, the quantity demanded is 10 million gallons per week and the quantity supplied is 5 million gallons per week. There is a shortage (5 million gallons per week). Price ceilings lead to shortages. Shortages create a rationing problem --- somehow, it must be determined who will get the product and who will not. There are many ways to resolve the problem of shortages. (1) The most common way to resolve the shortage problem is first-come, first-served . Shortages are typically associated with long lines. In the case of apartments, there are perhaps hundreds of people looking for each apartment that is vacant. In the case of gasoline and sports teams, people stand in line for
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Economics 101Chapter08 - 1 Objectives for Chapter 8 Price...

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