Price floor and price ceilings

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Intros
Lessons
1. Price Floors and Price Ceilings Overview:
2. Price Ceilings
• Definition of Price Ceiling
• 2 Cases for Price Ceiling
• Problems with Rent Ceiling
• An Example
3. Price Floor
• Definition of Price Floor
• 2 Cases for Price Floor
• Problems with Price Floor
• An Example
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Examples
Lessons
1. Understanding Price Ceilings
Consider the following graph of the market:
1. What are the equilibrium price and quantity?
2. If the price ceiling is set to $50 dollars, what is the quantity supplied and the quantity demanded. Is there a shortage or a surplus? 3. Calculate the deadweight loss caused by the price ceiling 2. Suppose the demand function is P = 300 - 2Q, and the supply function is S = 100 + 3Q. 1. What are the equilibrium price and quantity? 2. If the price ceiling is set to$190 dollars, what is the quantity supplied and the quantity demanded? Is there a shortage or a surplus?
3. What is the maximum price that someone is willing to buy for the last item available on a black market?
3. Understanding Price Floors
Consider the following graph of the market:
1. What are the equilibrium price and quantity?
2. If the price floor is set to $25 dollars, what is the quantity supplied and the quantity demanded. Is there a shortage or a surplus? 3. Calculate the deadweight loss caused by the price floor. 4. Suppose we have the following information:  Wage rate (dollars per hour) Quantity demanded (hours per month) Quantity Supplied (hours per month) 7 1500 500 8 1250 750 9 1000 1000 10 750 1250 11 500 1500 1. Calculate the equilibrium price and quantity. 2. If the minimum wage is set to$10, how many hours are worked and how many hours are unemployed?
3. The minimum wage is set to \$10, and demand for labour increases to 250 hours per month. How many hours are worked, and how many hours are unemployed?
Topic Notes

Price Ceilings

Price Ceiling: a government law that makes it illegal to charge higher than the specified price.

Two things can happen when a price ceiling is implemented.

Case 1: The price ceiling is above  the equilibrium price. In this case there is no effect on anything, and the equilibrium price and quantity stay the same.

Case 2: The price ceiling is below  the equilibrium price. In this case, there will be an underproduction of the quantity supplied, and a higher willingness to pay from consumers. This decreases the economic surplus and creates deadweight loss.

Problems with Rent Ceiling
1. Shortage of Housing
2. Creates a Black Market
3. Increased Search Activity

Price Floor

Price Floor: a government law that makes it illegal to charger lower than the specified price.

Two things can happen when a price floor is implemented.

Case 1: The price ceiling is below  the equilibrium price. In this case there is no effect on anything, and the equilibrium price and quantity stay the same.

Case 2: The price ceiling is above  the equilibrium price. In this case, there will be an overproduction of the quantity supplied, and a lower willingness to pay from consumers. This decreases the economic surplus and creates deadweight loss.

Problems with Price Floor
1. Surplus of labour & unemployment
2. Job Searching