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 product3-1© 2012 McGraw-Hill Ryerson Limited
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Price Ceiling
• 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 • Price ceilings cause shortages
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LO3
Allocating Shortages
• The market (supply and demand)
• First come, first served
• Producers’ preferences
• Rationing
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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 marketwere to develop, what would be the maximum illegal market price?
Self-Test
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Quota• A quota, or restricting output, can raise price
without causing a surplus
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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?
Self-Test
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