Price Ceilings Explained Step by Step

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Price Ceilings Explained Step by Step


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Price Ceilings and Price Floors : How market prices are “distorted” by Government Policies Price Ceilings and Price Floors

Supply/Demand and Government Policies---Price Ceilings and Price Floors : Supply/Demand and Government Policies---Price Ceilings and Price Floors In a free, unregulated market system, market forces establish equilibrium prices and quantities. While equilibrium conditions may be efficient, not everyone will be satisfied with prevailing market price (either too high or too low) Price controls are usually implemented when it is perceived that the market price is unfair to either buyers OR sellers

Supply/Demand and Government Policies---Price Ceilings and Price Floors : Supply/Demand and Government Policies---Price Ceilings and Price Floors Price Ceiling A legal maximum on the price at which a good can be sold. Price Floor A legal minimum on the price at which a good can be sold.

PowerPoint Presentation : We are going to examine a PRICE CEILING first…

Supply/Demand and Government Policies---Price Ceilings and Price Floors : Supply/Demand and Government Policies---Price Ceilings and Price Floors Two outcomes are possible when the government imposes a price ceiling: The price ceiling is not binding if set above the equilibrium price. The price ceiling is binding if set below the equilibrium price, leading to a shortage We will look at a BINDING Price Ceiling and a NON-Binding Price Ceiling

PowerPoint Presentation : Price Of ___ Quantity of _____________ P e Q e D* S* Market for _________________ This graph represents a market For a good that could be subject To BIG changes in the price of the good In the event of a natural disaster. Ex: Water, gasoline, basic food staples It is in “normal” equilbrium at: “ Pe ” and “ Qe ”---Point “A” “A”

PowerPoint Presentation : Price Of ___ Quantity of _____________ P e Q e D* S* P 1 Q 1 Market for _________________ D 1 Assume a Natural Disaster occurs In an big Metropolitan area. The Demand for the aforementioned Goods is going to increase as residents Stock up on these items. The DEMAND for this items is going to INCREASE—Demand Curve shifts to the RIGHT. A new market equilibrium price and quantity are established at “P1” and “Q1” – Point “B”. “A” “B”

PowerPoint Presentation : Price Of ___ Quantity of _____________ P e Q e D* S* P 1 Q 1 Market for _________________ D 1 If the price rises TOO MUCH, Then there may be cries of “PRICE GOUGING!!!” and a Demand for Govt to do something The govt may impose a PRICE CEILING . A Price Ceiling keeps the market price At a legally mandated level---sellers Cannot raise the price above the Ceiling “A” “B”

PowerPoint Presentation : Price Of ___ Quantity of _____________ P e = Price Ceiling Q s D* S* P 1 Market for _________________ D 1 Q d Assume the Govt sets the Price Ceiling at the regular price the Good was sold at before the crisis- ---” Pe ” In other words, sellers are not p ermitted to raise the price at a ll, even if there are consumers “willing and able” to pay a h igher price (“P1”) at Point “B” for additional Quantities of the good. “A” “B” “C”

PowerPoint Presentation : Price Of ___ Quantity of _____________ P e = Price Ceiling Q s D* S* P 1 Market for _________________ D 1 Q d “SHORTAGE” (difference between Qs and Qd ) At “ Pe ” we can see the Quantity Supplied is at “Qs” –Point “A” (our supply curve d id not shift—we stay at that point) and the Quantity Demanded is at “ Qd ”—Point “C” (our Demand curve shifted to t he right). Quantity Demanded is g reater than Quantity Supplied at “ Pe ”. Everyone is r ushing out to stock up at “ Pe ” a rate greater than before t he crisis! A “ SHORTAGE” of the good( Qd – Qs) will arise in the marketplace. Shelves will be emptied! Lines will form at the Gas station! “A” “B” “C”

PowerPoint Presentation : Price Of ___ Quantity of _____________ P e = Price Ceiling Q s D* S* P 1 Market for _________________ D 1 Q d “SHORTAGE” If the actual market clearing Price —”P1” (absent the Price Ceiling) Stays above the Price Ceiling, Then the Price Ceiling price will Be in effect. This indicates the Price Ceiling Is “BINDING” on the market. It is accomplishing its goal of Keeping the market price from Rising and “harming” consumers. However, keep in mind at the Price Ceiling (“ Pe ”) there may be NOTHING TO BUY!! How does THAT help in a disaster? “A” “B” “C”

PowerPoint Presentation : Price Of ___ Quantity of _____________ P e = Price Ceiling Q s D* S* P 1 Market for _________________ D 1 Q d “SHORTAGE” Now lets assume between Legal (and illegal ) responses to the Shortage of the good, the supply of the good increases dramatically. You have legitimate suppliers of Water, food stuffs, gasoline, etc , Shipping in larger quantities. You also have not so legitimate Suppliers buying these items far away from the disasters areas and Bringing them in to try to make a Quick dollar at the illegal price of “P1”. NOW, the supply of those items Is going to INCREASE dramatically. This next slide is messy as I shift the Supply curve to the right. The slide a fter it will be simplified. “A” “B” “C”

PowerPoint Presentation : Price Of ___ Quantity of _____________ Q s D* S* P 1 Market for _________________ D 1 Q d S 1 P 2 “SHORTAGE” P e = Price Ceiling “A” “B” “C” “D ” Told you! Notice the supply Curve shifted to the RIGHT “S1”. The NEW MARKET PRICE is “P2” and the Market Quantity Is “Qe1” --- at Point “D” The next slide simplifies …. Qe1

PowerPoint Presentation : Price Of ___ Quantity of _____________ D* S* Market for _________________ D 1 S 1 P 2 P e = Price Ceiling Qe1 “A” “C” “D ” The new market price “P2” is now LOWER Than the Price Ceiling (“ Pe ”) This is a GOOD thing For consumers. Because Consumers Can now buy these goods At a lower price than the Price Ceiling, the Price Ceiling “ Pe ” is said to be: “NON-BINDING” Consumers are free to buy at the new, lower market price and sellers are free to sell At the lower market price.

PowerPoint Presentation : Price Of ___ Quantity of _____________ D* S* Market for _________________ D 1 S 1 P 2 P e = Price Ceiling Qe1 “A” “C” “D ” If something additional happens in this market and pushes the price back up OVER The established Price Ceiling, then the Price Ceiling will Become BINDING again. So it goes… I hope this helped you understand Price Ceilings Stay tuned for Price Floors It is JUST as exciting!! “B”

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