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Econ 201 chapter 6
Price Controls
| Question | Answer | |
|---|---|---|
| Attempt to set, or manipulate, prices through government regulations in the market | Price controls | Price ceiling/floor |
| Legally established maximum price for a good or service | Price ceiling | Limit how expensive the price of drugs/medicine is |
| Legally established minimum price for a good or service | Price floor | Minimum wage |
| What are The Effects of Price Ceilings | 1. A nonbinding price ceiling 2. A binding price ceiling 3. Long-run effects of price ceiling | |
| Nonbinding price ceiling means: | price can be less than or equal to maximum price to be legal. If higher it is illegal | |
| If nonbinding price ceiling is higher than equilibrium then what effect? | No effect This is because there is no change in the equilibrium point. | |
| If nonbinding ceiling is less than equilibrium then what effect? | Equilibrium will change since it is an illegal price. This will stay illegal because a shortage will happen Consumers will pay more since they need it in the illegal market | |
| In relation to equilibrium, where is a binding price ceiling? | Below equilibrium | |
| In relation to equilibrium, where is a non binding price ceiling? | Above equilibrium | |
| Binding price ceiling causes a: | Shortage With so little available, people are willing to spend more money on product, even if it is illegally priced | |
| INFORMATION Price Ceilings in the Long Run (SUPPLY) Suppliers produce less product and make more products not subject to price controls | ||
| INFORMATION Price Ceilings in the Long Run (Demand) Consumers will try using different products | ||
| INFORMATION Price Ceilings in the Long Run Shortages get larger Adds illegal Market Illegal market prices less than before Consumers have time to find alternatives | ||
| What happens to shortages from price ceilings in the long run? | Shortages get larger | |
| What will be the effect of a nonbinding price ceiling? A. A surplus will be created. B. A shortage will be created. C. There will be no effect. D. The effect is unknown | C. There will be no effect. | |
| In the event of a binding price ceiling, what is one function that an illegal market serves? A. It reduces the shortage caused by the price ceiling. B. It decreases the price even further. C. It creates a monopoly. D. It causes a surplus of the good. | A. It reduces the shortage caused by the price ceiling | |
| EXAMPLE • Rent control ➢ Price ceiling that applies to the market for apartment rentals | ||
| What are some unintended consequences of rent controls? | less maintenance or decay • Landlords can charge “add-on-fees” to increase revenues. • Long-term investment in the building of new units decreases → makes the shortage worse in the long run | |
| Example: $6 price floor on milk Will the quantity of milk for sale change? | Consumers will purchase less but producers will manufacture more. Surplus! | |
| Example: $6 price floor on milk Will the size of a typical container change? | Since the price floor is $6.00, manufacturers can make their product more attractive by increasing the size of each container. Milk containers would get bigger | |
| Example: $6 price floor on milk Would producers sell below the price floor? | Due to the surplus, sellers would have a strong incentive to undercut the price floor in order to avoid having to discard leftover milk. Illegal discounts would help to reduce the milk surplus | |
| Example: $6 price floor on milk Are milk producers better off? | Not if they have trouble selling what they produce. There will be a lot of spoiled milk | |
| what is a nonbinding price floor? | A nonbinding price floor is a legal minimum price set below the market's equilibrium price | |
| What is the effect of a nonbinding price floor? | A nonbinding price floor has no effect on the market because the natural equilibrium price is already higher. | |
| what is a nonbinding price floor? | A binding price floor is an imposed minimum price for a good or service that is set above the market's natural equilibrium price. | |
| What is the effect of a binding price floor? | Since the price is high, more producers want to supply the good than consumers want to buy, leading to a surplus | |
| What is the effect of a binding price floor in the long run? | A larger surplus | |
| EXAMPLE Price floor: Minimum wage | ||
| What happens when there is a binding minimum wage in the long run? | Demand and supply are more elastic In the long run, unemployment is greater than in the short run. | |
| What happens when there is a binding minimum wage in the short run? | In the short run, demand for labor tends to be relatively inelastic, so firms cannot quickly replace workers. The same is not true in the long run | |
| INFORAMTION Causes of the unemployment created by minimum wage: • Decrease in QD of labor and increase in QS of labor • Firms may replace low-skilled jobs with capital. | ||
| What are the causes of unemployment created by minimum wage? | • Decrease in QD and increase in QS of labor • Firms may replace low-skilled jobs with capital. • Shortening hours for workers • Firms may relocate where no minimum wage | |
| What happens if the minimum wage is below the market equilibrium wage? | Since the new minimum wage is still below the equilibrium wage, there is no effect. | |
| Why would the government impose a nonbinding minimum wage? | -politically motivated reasons—by increasing the minimum wage, politicians win support from voters. - But by making it nonbinding, the government avoids the negative consequences. ➢-Increases in minimum wage tend to lag increases in the market wage | |
| INFORMATION • A price ceiling is a legally imposed maximum price. ➢ The direct consequence is a shortage. ➢ But there are also unintended consequences | ||
| INFORMATION • A price floor is a legally imposed minimum price. ➢ The direct consequence is a surplus. ➢ As with ceilings, there are also unintended consequences |
Created by:
logandubois5