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PRICE CEILINGS AND FLOORS

PRICE CEILINGS AND FLOORS. Microeconomics Made Easy by William Yacovissi Mansfield University William Yacovissi All Rights Reserved. PRICE CEILINGS. At times the government decides the market price of a product is unfairly high. In these cases the government may impose a price ceiling.

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PRICE CEILINGS AND FLOORS

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  1. PRICE CEILINGS AND FLOORS Microeconomics Made Easy by William Yacovissi Mansfield University William Yacovissi All Rights Reserved

  2. PRICE CEILINGS • At times the government decides the market price of a product is unfairly high. • In these cases the government may impose a price ceiling. • A price ceiling is a price set by law that is below the equilibrium price

  3. PRICE CEILINGS • Price ceilings are imposed when people decide the market price is unfair or is somehow being manipulated by suppliers. • History has shown that price ceilings cause more problems than they solve. • What happens when a price ceiling is imposed

  4. PRICE CEILINGS • The table on the next slide shows the market for video rentals that we’ve been using as an example. • Examine the consequences of setting the legal price of video rentals at $2.00

  5. PRICE CEILINGS

  6. CONSEQUENCES OF PRICE CEILINGS • Not to hard to see that the price ceiling causes a shortage of the product, in this case of 200 units a day. • Unless the price ceiling is enforced in some way suppliers will begin to sell the product at the higher market price.

  7. CONSEQUENCES OF PRICE CEILINGS • Some administrative and legal apparatus needs to be set up to monitor what people are doing and to take legal action against them to support the price ceiling • This costs money and creates a new class of lawbreakers. But, failure to enforce the price ceiling will quickly lead to its failure.

  8. CONSEQUENCES OF PRICE CEILINGS • Additionally, the shortage must be dealt with. Some scheme for rationing the available supply needs to be developed. • This also requires an administrative apparatus and costs money and is subject to corruption as well.

  9. CONSEQUENCES OF PRICE CEILINGS • Plus, the shortage is never resolved since the price ceiling discourages additional production and encourages additional consumption. • Think about these things before you support government price controls on gasoline/ • Needless to say, mainstream economists don’t like price ceilings.

  10. PRICE FLOORS • Price floors are the opposite of price ceilings. In this case the price is kept above the equilibrium market price • The effects of price floors are simply the opposite of price ceilings

  11. PRICE FLOORS • Considerable experience with price floors exists in the form a agricultural price supports • Price supports keep the price above equilibrium generating surplus production • Read the case in point on page 91 for insight into price floors

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