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:
    price ceiling equilibrium price and quantity
    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:
    price floor equilibrium price and quantity
    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
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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.


Price ceiling above equilibrium price

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.


Price ceiling below equilibrium price

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.


Price floor below equilibrium price

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.


Price floor above equilibrium price

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