Exam 2 notes - EXAM 2CRAM THIS IN YOUR BRAIN Chapter 5 I Price Controls A What are they 1 An attempt to manipulate price through government involvement

Exam 2 notes - EXAM 2CRAM THIS IN YOUR BRAIN Chapter 5 I...

This preview shows page 1 - 3 out of 8 pages.

EXAM 2—CRAM THIS IN YOUR BRAIN Chapter 5 I. Price Controls A. What are they? 1. An attempt to manipulate price through government involvement in the market. Price controls help to ease burdens on the population B. Two types of price controls 1. Price ceilings a. Create a legally established max price for a good or service a.i. Rent control 2. Price floors a. Create a legally established minimum price for a good or service a.i. Minimum wage laws C. Black markets 1. Illegal markets that arise when price controls are in place a. Although prostitution and the sale of narcotics are illegal, the demand for these goods continues to exist, so black markets have developed for them b. Prohibition **Price controls generally do not work. Shortages and surpluses will remain when the government dictates prices. II. Price ceilings **when price ceiling is low relative to market price, effects are widespread. When price ceiling is above market price, it is non-binding and has no effect b.A. What if there was a price ceiling on bread? b.A.1. Price drops, so demand goes up and quantity supplied falls because producers are receiving lower profits=shortage b.A.2. A black market will develop since bread is hard to find b.B. The effect of price ceilings b.B.1. Non-binding (when price ceiling is above equilibrium price) -- $2.00 for bread when the equilibrium price is $1 a.i.1.a.i.1.a. Effect- frustrated customers who want lower prices and producers who are concerned the price ceiling will become binding a.i.2. Binding (below market price)-- $.50 for bread a.i.2.a.i.1.a. Higher demand for bread, lower quantity supplied=shortage a.i.2.a.i.1.a.i. Shortages typically mean higher prices, but the price ceiling does not allow for that a.i.2.a.i.1.a.ii. Therefore, a black market develops for bread b.C. Price ceilings in the long run b.C.1. Supply and demand become more elastic (flatter) because people have additional time to make choices and can find ways to avoid high priced goods. Likewise, producers will not supply as much product. b.C.2. The shortage expands—SUPPLY- Quantity supplied goes down. producers will convert their bread making equipment to make similar products (like bagels or rolls) DEMAND- Quantity demanded goes up.
Image of page 1
flatter curve means consumers are more flexible. People will take advantage of low price ceiling by using more bread b.D. Rent contol b.E. Price gouging b.E.1. Places a temporary ceiling on prices that seller can change during times of national emergency until markets function normally b.E.1.a. After Hurricane Katrina, the market price of a generator went up b.E.1.b. When the demand for generators is high, the price needs to rise to ensure that available units are distributed to those who NEED them the most… this also provides sellers with an incentive to make more units available 2. Laws serve as non-binding price ceilings during normal times but when disaster strike, price gouging laws go into effect…creates a binding price ceiling as long as state of emergency is in effect.
Image of page 2
Image of page 3

You've reached the end of your free preview.

Want to read all 8 pages?

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern

Stuck? We have tutors online 24/7 who can help you get unstuck.
A+ icon
Ask Expert Tutors You can ask You can ask You can ask (will expire )
Answers in as fast as 15 minutes