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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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Price ceilings and floors l.jpg

PRICE CEILINGS AND FLOORS

Microeconomics Made Easy

by

William Yacovissi

Mansfield University

William Yacovissi All Rights Reserved


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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


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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


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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


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PRICE CEILINGS


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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.


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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.


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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.


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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.


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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


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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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