Transcript Price Controls government regulations to set either a - McGraw-Hill

LO3
Price Controls
Price Controls
government regulations to set either a maximum or
minimum price for a product
Price Ceiling
a government regulation stipulating the maximum
price that can be charged for a product
Price Floor
a government regulation stipulating the minimum price
that can be charged for a product
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LO3
Price Ceiling
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Used when present market price for a particular
product is considered too high for many buyers
The product is felt to be a necessity
Example: rent control
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LO3
Price Ceiling
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Price ceilings cause shortages
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LO3
Allocating Shortages
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The market (supply and demand)
First come, first served
Producers’ preferences
Rationing
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LO3
Self-Test
a) Suppose the government introduces a price ceiling
that is 20 cents different from the present equilibrium
price. Would the result be a surplus or a shortage? Of
what quantity?
b) If an illegal market
were to develop,
what would be
the maximum
illegal market
price?
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LO3
Quota
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A quota, or restricting output, can raise price
without causing a surplus
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LO3
Self-Test
a) In equilibrium, what is the total revenue received by
producers?
b) Suppose that government imposes a price floor of $4
per kilo. What quantity
will be demanded?
What quantity will
farmers produce?
What quantity will
government buy?
c) How much will it
cost to buy the
surplus?
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