Transcript Price Ceilings and Price Floors

Price Ceilings and Price Floors
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Market for Tickets
Read the following passage from a New York Times newspaper article and
answer the three questions that follow. After you have answered the
questions, pair up with another student and discuss your answers. Then,
use the graph on the back to follow along with the teacher.
Go to the Article
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Market for Tickets
“In the Race to Buy Concert Tickets, Fans Keep Losing”
By Ellen Rosen
Published 6 October 2007 in the New York Times
Lisa Senauke, a Bruce Springsteen fan since 1973, tried to get tickets to his Oct. 26 concert in Oakland, Calif.
The tickets were to go on sale at 10 a.m. on Sept. 17, and starting at 9:58 a.m., she logged into her
Ticketmaster.com account, credit card in hand. But though she tried again and again for the next hour to buy
tickets, she was always told the same thing: nothing available.
Ms. Senauke’s frustration is not isolated. The coming concerts of…Miley Cyrus…sold out in minutes. And the
same thing happened with tickets to recent reunion tours by the Police and Van Halen.
While some fans just quietly give up, others have complained to government officials, particularly after they
found tickets to the same concerts available -- sometimes at many times the face value -- on secondary
sellers like Stubhub.com and TicketsNow minutes after the public sale began.
Answer These Questions
On Your Paper
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Market for Tickets
“In the Race to Buy Concert Tickets, Fans Keep Losing”
By Ellen Rosen
Published 6 October 2007 in the New York Times
Lisa Senauke, a Bruce Springsteen fan since 1973, tried to get tickets to his Oct. 26 concert in Oakland, Calif.
The tickets were to go on sale at 10 a.m. on Sept. 17, and starting at 9:58 a.m., she logged into her
Ticketmaster.com account, credit card in hand. But though she tried again and again for the next hour to buy
tickets, she was always told the same thing: nothing available.
Ms. Senauke’s frustration is not isolated. The coming concerts of…Miley Cyrus…sold out in minutes. And the
same thing happened with tickets to recent reunion tours by the Police and Van Halen.
While some fans just quietly give up, others have complained to government officials, particularly after they
found tickets to the same concerts available -- sometimes at many times the face value -- on secondary
sellers like Stubhub.com and TicketsNow minutes after the public sale began.
1) In terms of supply and demand, what problem exists in the market for concert tickets?
2) Is this market in equilibrium? How do you know?
3) What is one idea you can think of to help solve this problem?
Go to the Graph
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Market for Tickets
4) Use the data and graph below to complete the following.
a) Plot the data points onto the graph. Use all necessary labels.
b) Suppose Miley Cyrus only charges $60 per ticket. Draw this price
ceiling on the graph.
Price
($)
Demand
(thousands)
Supply
(thousands)
$20
90
10
$40
80
20
$60
70
30
$80
60
40
$100
50
50
$120
40
60
$140
30
70
$160
20
80
$180
10
90
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Draw Graph
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Market for Tickets
4) Use the data and graph below to complete the following.
a) Plot the data points onto the graph. Use all necessary labels.
b) Suppose Miley Cyrus only charges $60 per ticket. Draw this price
ceiling on the graph.
Price
($)
Demand
(thousands)
Supply
(thousands)
$20
90
10
$40
80
20
$60
70
30
$80
60
40
$100
50
50
$120
40
60
$140
30
70
$160
20
80
$180
10
90
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S
Price Ceiling
Draw Graph
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Market for Tickets
5) What is the equilibrium price and quantity in this market?
6) If the price Miley Cyrus charges for each ticket is below equilibrium, why
doesn’t she raise her prices?
Price
($)
Demand
(thousands)
Supply
(thousands)
$20
90
10
$40
80
20
$60
70
30
$80
60
40
$100
50
50
$120
40
60
$140
30
70
$160
20
80
$180
10
90
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S
Price Ceiling
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Price Ceilings
Governments occasionally intervene in the free market by creating a price
ceiling, which is a maximum price sellers are allowed to charge.
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Price Ceilings
Governments occasionally intervene in the free market by creating a price
ceiling, which is a maximum price sellers are allowed to charge.
1) The Price Ceiling
S
A) Government may decide to limit
prices to help consumers.
Price Ceiling
D
One example of a price ceiling is the market for
apartments in New York City. The government limits
the price apartment owners can charge their tenants.
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Price Ceilings
Governments occasionally intervene in the free market by creating a price
ceiling, which is a maximum price sellers are allowed to charge.
1) The Price Ceiling
S
A) Government may decide to limit
prices to help consumers.
Equilibrium
B) Price ceilings are only effective if
placed below equilibrium.
Price Ceiling
D
Notice how the equilibrium price is $1,400, but the
price ceiling only allows landlords to charge $800.
This is called a binding price ceiling.
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Price Ceilings
Governments occasionally intervene in the free market by creating a price
ceiling, which is a maximum price sellers are allowed to charge.
1) The Price Ceiling
S
A) Government may decide to limit
prices to help consumers.
B) Price ceilings are only effective if
placed below equilibrium.
C) Price ceilings cause shortages.
Shortage
D
In this example, 5 million apartments are demanded,
but only 2 million are supplied. There is a shortage of
3 million apartments.
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Price Ceilings
Governments occasionally intervene in the free market by creating a price
ceiling, which is a maximum price sellers are allowed to charge.
1) The Price Ceiling
S
A) Government may decide to limit
prices to help consumers.
B) Price ceilings are only effective if
placed below equilibrium.
C) Price ceilings cause shortages.
Shortage
2) Shortages
D
A) A shortage means not all demand
can be satisfied by the supply.
In this example, 5 million apartments are demanded,
but only 2 million are supplied. There is a shortage of
3 million apartments.
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Price Ceilings
Governments occasionally intervene in the free market by creating a price
ceiling, which is a maximum price sellers are allowed to charge.
1) The Price Ceiling
S
A) Government may decide to limit
prices to help consumers.
B) Price ceilings are only effective if
placed below equilibrium.
C) Price ceilings cause shortages.
Shortage
2) Shortages
D
A) A shortage means not all demand
can be satisfied by the supply.
B) Market forces are unable to push
the price back to equilibrium.
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In this example, 5 million apartments are demanded,
but only 2 million are supplied. There is a shortage of
3 million apartments.
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Price Ceilings Are Inefficient
Price ceilings cause a market to be inefficient because there are missed
opportunities for transactions.
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Price Ceilings Are Inefficient
Price ceilings cause a market to be inefficient because there are missed
opportunities for transactions.
1) Inefficient Allocation
Consumers who really want the good
do not get it, and those who care only
a little do get it.
In New York City, some people desperately need an
apartment. Current residents, however, might want to
move but do not want to give up their spot.
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Price Ceilings Are Inefficient
Price ceilings cause a market to be inefficient because there are missed
opportunities for transactions.
1) Inefficient Allocation
Consumers who really want the good
do not get it, and those who care only
a little do get it.
2) Wasted Resources
Consumers spend extra time and
money dealing with shortages.
Consumers who need an apartment in New York City
end up spending a great deal of time and money
looking for an available apartment.
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Price Ceilings Are Inefficient
Price ceilings cause a market to be inefficient because there are missed
opportunities for transactions.
1) Inefficient Allocation
Consumers who really want the good
do not get it, and those who care only
a little do get it.
2) Wasted Resources
Consumers spend extra time and
money dealing with shortages.
3) Inefficiently Low Quality
Due to lower prices, suppliers offer a
low-quality product even though
buyers prefer higher quality.
Because price ceilings limit a landlord’s revenue,
he/she will often cut costs in undesirable ways, such
as neglecting needed building maintenance.
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Price Ceilings Are Inefficient
Price ceilings cause a market to be inefficient because there are missed
opportunities for transactions.
1) Inefficient Allocation
Consumers who really want the good
do not get it, and those who care only
a little do get it.
2) Wasted Resources
Consumers spend extra time and
money dealing with shortages.
3) Inefficiently Low Quality
Due to lower prices, suppliers offer a
low-quality product even though
buyers prefer higher quality.
4) Black Markets
Due to shortages, goods may be
exchanged illegally at a higher price.
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New York City apartments will often be sublet to other
individuals illegally, or the landlord may allow a tenant
to rent from him/her in exchange for monthly bribes.
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Price Floors
Governments occasionally intervene in the free market by creating a price
floor, which is a minimum price buyers are required to pay.
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Price Floors
Governments occasionally intervene in the free market by creating a price
floor, which is a minimum price buyers are required to pay.
1) The Price Floor
Price Floor
A) Government may decide to raise
prices to help producers.
S
D
One example of a price floor is the market for milk.
The government sets a minimum price for milk in
order to help America’s dairy farmers.
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Price Floors
Governments occasionally intervene in the free market by creating a price
floor, which is a minimum price buyers are required to pay.
1) The Price Floor
Price Floor
A) Government may decide to raise
prices to help producers.
S
B) Price floors are only effective if
placed above equilibrium.
Equilibrium
D
Notice how the equilibrium price is $1.00, but the
price floor ensures that each gallon costs a minimum
of $2.00. This is called a binding price floor.
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Price Floors
Governments occasionally intervene in the free market by creating a price
floor, which is a minimum price buyers are required to pay.
1) The Price Floor
A) Government may decide to raise
prices to help producers.
Surplus
S
B) Price floors are only effective if
placed above equilibrium.
C) Price floors cause surpluses.
D
In this example, 1100 million gallons are supplied, but
only 300 million are demanded. There is a surplus of
800 million gallons.
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Price Floors
Governments occasionally intervene in the free market by creating a price
floor, which is a minimum price buyers are required to pay.
1) The Price Floor
A) Government may decide to raise
prices to help producers.
Surplus
S
B) Price floors are only effective if
placed above equilibrium.
C) Price floors cause surpluses.
2) Surpluses
D
A) A surplus means demand is
smaller than the supply.
In this example, 1100 million gallons are supplied, but
only 300 million are demanded. There is a surplus of
800 million gallons.
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Price Floors
Governments occasionally intervene in the free market by creating a price
floor, which is a minimum price buyers are required to pay.
1) The Price Floor
A) Government may decide to raise
prices to help producers.
Surplus
S
B) Price floors are only effective if
placed above equilibrium.
C) Price floors cause surpluses.
2) Surpluses
D
A) A surplus means demand is
smaller than the supply.
B) Market forces are unable to pull the
price back to equilibrium.
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In this example, 1100 million gallons are supplied, but
only 300 million are demanded. There is a surplus of
800 million gallons.
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Price Floors Are Inefficient
Price floors cause a market to be inefficient because there are missed
opportunities for transactions.
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Price Floors Are Inefficient
Price floors cause a market to be inefficient because there are missed
opportunities for transactions.
1) Inefficient Allocation
Suppliers who are willing to sell at a
lower price are not able to do so.
The minimum wage is considered a kind of price floor
where workers are the supply. Employers are willing
to hire more people but wages are too high.
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Price Floors Are Inefficient
Price floors cause a market to be inefficient because there are missed
opportunities for transactions.
1) Inefficient Allocation
Suppliers who are willing to sell at a
lower price are not able to do so.
2) Wasted Resources
The resources used to create
surpluses are essentially wasted.
Some agricultural products have price floors. The
surpluses are either burned or are allowed to go bad
before being thrown away.
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Price Floors Are Inefficient
Price floors cause a market to be inefficient because there are missed
opportunities for transactions.
1) Inefficient Allocation
Suppliers who are willing to sell at a
lower price are not able to do so.
2) Wasted Resources
The resources used to create
surpluses are essentially wasted.
3) Inefficiently High Quality
Due to high prices, suppliers offer a
high-quality product even though
buyers prefer lower quality.
International airfares used to be regulated with price
floors. Airlines provided lavish in-flight service, but
what people really wanted was cheap airfare.
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Price Floors Are Inefficient
Price floors cause a market to be inefficient because there are missed
opportunities for transactions.
1) Inefficient Allocation
Suppliers who are willing to sell at a
lower price are not able to do so.
2) Wasted Resources
The resources used to create
surpluses are essentially wasted.
3) Inefficiently High Quality
Due to high prices, suppliers offer a
high-quality product even though
buyers prefer lower quality.
4) Illegal Activity
Due to surpluses, goods may be
exchanged illegally at a lower price.
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To get around the minimum wage law, workers who
are desperate for a job are sometimes willing to be
paid a lower wage under the table.
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Quantity Controls
Governments can also intervene in the free market by controlling quantity. A
quota is the highest quantity of a good or service that can be supplied.
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Quantity Controls
Governments can also intervene in the free market by controlling quantity. A
quota is the highest quantity of a good or service that can be supplied.
1) Government sets a quota limit by
issuing licenses to suppliers.
Many fish in the United States are regulated through
quotas. This means that fishermen must receive a
license in order to catch a predefined amount of fish.
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Quantity Controls
Governments can also intervene in the free market by controlling quantity. A
quota is the highest quantity of a good or service that can be supplied.
1) Government sets a quota limit by
issuing licenses to suppliers.
S
2) If the quota is less than equilibrium,
a wedge is driven between the
demand price and the supply price.
Wedge
Quota
D
Notice that the quota is 3,000 pounds of salmon. This
is 2,000 pounds short of the equilibrium quantity.
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Quantity Controls
Governments can also intervene in the free market by controlling quantity. A
quota is the highest quantity of a good or service that can be supplied.
1) Government sets a quota limit by
issuing licenses to suppliers.
Demand
Price
2) If the quota is less than equilibrium,
a wedge is driven between the
demand price and the supply price.
Wedge
3) Buyers pay a higher price than the
price received by the seller.
S
Quota
Supply
Price
D
When the quantity is 3,000 pounds of salmon,
consumers are willing to pay $7 per pound while
producers only want to charge $3 per pound.
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Quantity Controls
Governments can also intervene in the free market by controlling quantity. A
quota is the highest quantity of a good or service that can be supplied.
1) Government sets a quota limit by
issuing licenses to suppliers.
Demand
Price
2) If the quota is less than equilibrium,
a wedge is driven between the
demand price and the supply price.
Quota
Rent
3) Buyers pay a higher price than the
price received by the seller.
4) The difference in prices is the
quota rent -- the earnings made from
the right to sell the good.
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Quota
Supply
Price
D
Consumers are charged $7. Because the license is a
hot commodity, however, a license holder could sell
the license for $4, which is the value of the wedge.
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Pros and Cons of Price Controls
Pros
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Cons
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Pros and Cons of Price Controls
Pros
Cons
Price ceilings help keep prices low for
consumers.
The price ceiling for New York City apartments
has helped keep prices low for people who
actually have apartments.
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Pros and Cons of Price Controls
Pros
Cons
Price ceilings help keep prices low for
consumers.
Price floors help suppliers make more
money.
The price floor in the milk market has helped keep
prices high for America’s dairy farmers.
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Pros and Cons of Price Controls
Pros
Cons
Price ceilings help keep prices low for
consumers.
Price floors help suppliers make more
money.
Quantity controls may have environmental
benefits.
Regulations on fishing ensure that seafood
populations will not be fished out of existence.
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Pros and Cons of Price Controls
Pros
Cons
Price ceilings help keep prices low for
consumers.
Price floors help suppliers make more
money.
Quantity controls may have environmental
benefits.
Price controls
problems.
can
correct
allocation
Ticket prices to professional sports events are
generally low to ensure that even low-income
consumers can occasionally go to a game.
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Pros and Cons of Price Controls
Pros
Cons
Price ceilings help keep prices low for
consumers.
Causes persistent shortages or surpluses.
Price floors help suppliers make more
money.
Quantity controls may have environmental
benefits.
Price controls
problems.
can
correct
allocation
Because performers want to ensure a sold out
show, ticket prices generally remain below
equilibrium, causing shortages.
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Pros and Cons of Price Controls
Pros
Cons
Price ceilings help keep prices low for
consumers.
Causes persistent shortages or surpluses.
Price floors help suppliers make more
money.
Resources are not allocated efficiently.
Quantity controls may have environmental
benefits.
Price controls
problems.
can
correct
allocation
The oil crisis of the 1970s caused the U.S.
government to set price ceilings on gasoline.
People had to wait in long lines at the pump.
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Pros and Cons of Price Controls
Pros
Cons
Price ceilings help keep prices low for
consumers.
Causes persistent shortages or surpluses.
Price floors help suppliers make more
money.
Resources are not allocated efficiently.
Quantity controls may have environmental
benefits.
Emergence of illegal and black market
activities.
Price controls
problems.
can
correct
allocation
Due to price ceilings in the concert ticket market,
people find it very profitable to buy a bunch of
tickets and resell them illegally at a higher price.
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Pros and Cons of Price Controls
Pros
Cons
Price ceilings help keep prices low for
consumers.
Causes persistent shortages or surpluses.
Price floors help suppliers make more
money.
Resources are not allocated efficiently.
Quantity controls may have environmental
benefits.
Emergence of illegal and black market
activities.
Price controls
problems.
Special interest groups push for price
controls for political reasons.
can
correct
allocation
Many of the price floors in agricultural markets are
a result of powerful lobbyists who have convinced
politicians to enact these laws.
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Price Controls
DIRECTIONS
Use the graph at the bottom of the front page to answer the questions about
the price controls for apartments in New York City. On the back side, use the
graph to answer the questions about the price controls for corn.
S
S
D
D
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