1. Price Controls

2. What you will learn ... Maximum price control Minimum price control Take this challenge

3. Maximum price control A price ceiling on a good is imposed when the government sets a limit on the _________ price that sellers can charge. maximum Examples: Bus fares Taxi fares

4. Price S Price ($) Price ($) Qd Qd Qs Qs 12 14 16 18 20 12 14 16 18 20 660 630 600 570 540 660 630 600 570 540 480 540 600 660 720 480 540 600 660 720 16 D Quantity 600 0 Q Maximum price control Effects: What are the equilibrium price, quantity transacted and total revenue?

5. Price S Price ($) Price ($) Qd Qd Qs Qs 12 14 16 18 20 12 14 16 18 20 660 630 600 570 540 660 630 600 570 540 480 540 600 660 720 480 540 600 660 720 16 12 D Quantity 480 660 600 0 Maximum price control Effects: Suppose the government imposes a price ceiling of $12 per unit.

6. Price S 16 D Quantity 600 0 Maximum price control Effects: decrease The price will ________ (from ____ to ____ ). $16 $12 At a price of $12, the quantity demanded is greater / smaller than the quantity supplied. 12 There is a shortage of ____units. 480 660 180

7. Price S 16 D Quantity 600 0 Q Maximum price control The quantity transacted will _________________. Effects: decrease to 480 units The total revenue will increase / decrease to _________________. $5,760 (=$12 x 480) A ___________ , where the price is ______ than the regulated price, may emerge. black market 12 higher 480 660 What if the price ceiling is imposed above the equilibrium level? Answer

8. Maximum price control Non-price methods of rationing: First-come, first-served ___________________ Provision of public clinic services

9. Maximum price control Non-price methods of rationing: First-come, first-served ___________________ By ability ________ Allocation of places in universities

10. Maximum price control Non-price methods of rationing: First-come, first-served ___________________ By ability ________ By sellers’ preference By need _______ Beds in public hospitals

11. Maximum price control Non-price methods of rationing: First-come, first-served ___________________ By ability ________ By sellers’ preference By need _______ By drawing lots ______________ Flats under the Home Ownership Scheme

12. Filipino maids enjoy a minimum wage protection in Hong Kong. Minimum price control A price floor on a good is imposed when the government sets a limit on the ________ price that buyers will pay. minimum Example:

13. Price S Price ($) Price ($) Qd Qd Qs Qs 8 9 10 11 12 8 9 10 11 12 600 570 540 510 480 600 570 540 510 480 420 480 540 600 660 420 480 540 600 660 10 D Quantity 540 0 Q Minimum price control Effects: What are the equilibrium price, quantity transacted and total revenue?

14. Price S Price ($) Price ($) Qd Qd Qs Qs 11 8 9 10 11 12 8 9 10 11 12 600 570 540 510 480 600 570 540 510 480 420 480 540 600 660 420 480 540 600 660 10 D Quantity 510 600 540 0 Minimum price control • Effects: Suppose the government imposes a price floor at $11 per unit.

15. Price S 10 D Quantity 540 0 Minimum price control • Effects: The price of the good will _____________. increase to $11 At a price of $11, the quantity demanded is greater / smaller than the quantity supplied. 11 There is a surplus of ____ units. 510 600 90

16. Price S 10 D Quantity 540 0 Minimum price control • Effects: The quantity transacted will _________________. decrease to 510 units The sellers’ total revenue may increase or decrease, depending on the ______ _________________. 11 price elasticity of demand If the demand is elastic, the total revenue will _______. 510 600 decrease Gain Loss

17. Take this challenge 1 Suppose the supply of a good is fixed and there is an effective maximum price control. If the government raises the price ceiling, what are the effects on: (a) the quantity transacted of that good? Answer (b) the total revenue of sellers? Answer

18. Take this challenge 2 Suppose the government lowers the minimum wage rate of Filipino maids. (a) What will the effect be on Filipino maids’ average waiting time for obtaining a job in Hong Kong? Answer (b) What will the effect be on the employment of local domestic servants? Answer