Transcript 1999 South-Western College Publishing

Principles of Economics
2nd edition
by Fred M Gottheil
PowerPoint Slides prepared by Ken Long
©1999 South-Western College Publishing
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Chapter 6
Price Ceilings &
Price Floors
3/27/2016
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This chapter discusses
principles associated with
Government
Intervention
in
Target
Prices
Crop Limitation
Parity
Price
Ceilings
Pricing
Programs
Price
Floors
Markets
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Civilian Goods
Production Possibilities Curve
Unattainable
Inefficient
Defense Goods
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What is a Price Ceiling?
A maximum price set by
government below the
market generated
equilibrium price
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A Price Ceiling
S
P
Shortage
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What would justify a
Price Ceiling?
A market price that is
considered to be too high
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Since a Price
Ceiling generates
excess demand who
gets the goods?
One way is to issue
rationing coupons
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What is a
Rationing Coupon?
A coupon issued by the
government entitling the
holder to purchase a
specific quantity
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What are some methods
to determine who would
get the coupons?
• First come first serve
• lottery
• elderly
• family size
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What are some examples
of Price Ceilings?
World War II
Rent control in some cities
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What is a Price Floor?
A minimum price set by
government above the
market equilibrium price
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A Price Floor
P
Surplus
S
D
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What could justify a
Price Floor?
To provide suppliers a
higher price than otherwise
would be the case
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What could cause a
decrease in
market price?
An improvement in
technology pushing the
supply curve rightward
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What is the effect of an
increase in technology?
Price would be lower and
quantity supplied would
by higher
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Increase in Supply
S1
P1
P2
S2
D
Q1
Q2
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What problem arises
with Price Floors?
Excess Supply
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What market exemplifies
the use of Price Floors?
American agriculture
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Why did farm prices fall
in the early 1900’s?
• Technology
• Rural electrification
• Chemicals & chemistry
• Larger farms
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What about Demand?
It did not increase as much as
the supply of food increased
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Increase in Supply & Demand
D2
D1
S1
S2
P1
P2
Q1
Q2
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How do we pick a
specific Price Floor?
One way is parity
pricing
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What is an example
of Parity?
Allowing farmers to get
the same value of nonfarm goods for a unit of
farm goods that they
received in 1910 - 1914
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Is there such a thing as
Partial Parity?
Yes, for example,
farmers can be
guaranteed 80% of
parity
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What is a
Parity Price Ratio?
The relationship of prices
received by farmers to
prices paid by farmers
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What is a Target Price?
The minimum price level
for farm goods that the
government sets and
guarantees
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P
S
P
D
0
Q
Crop Restriction
S
D
0
Q
Comparing outcomes of
Parity and Target
Pricing
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How widespread is the
use of price ceilings and
floors?
In our economy, they
represent exceptions
to the rule
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Why is Agriculture high tech?
http://www.nal.usda.gov/bic
http://www.nal.usda.gov/ttic
http://www.fb.com
http://www.ProgressiveFarmer.
com
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•
•
•
•
What is a Price Ceiling?
What is a Rationing Coupon?
What is a Price Floor?
Why did farm price fall in the
early 1900’s?
• What is a Parity Price Ratio?
• What is a Target Price?
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END
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