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Chapter 5 - Price Controls (Pt. 1)

by: Joana Marie

Chapter 5 - Price Controls (Pt. 1) Econ 2106

Marketplace > Georgia State University > Microeconomics > Econ 2106 > Chapter 5 Price Controls Pt 1
Joana Marie
GPA 4.0

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Chapter 5 covers the concept of Price Controls, which include its two different types known as price ceilings and price floors. These set of notes will cover the concept of price ceilings in det...
Professor Carycruz Bueno
Class Notes
Microeconomics, Economics, class, notes, price, Controls, ceilings, floors
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This 3 page Class Notes was uploaded by Joana Marie on Thursday September 29, 2016. The Class Notes belongs to Econ 2106 at Georgia State University taught by Professor Carycruz Bueno in Fall 2016. Since its upload, it has received 5 views. For similar materials see PRINCIPLES OF MICROECONOMICS in Microeconomics at Georgia State University.


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Date Created: 09/29/16
Chapter 5 – Price Controls (Pt. 1 – Price Ceilings)  Introduction 1. Minimum wage is an example of price control 2. History has shown us that price controls generally do not work a. They disrupt the normal functioning of the market b. Causes disequilibrium 3. 2 Most Common Types of Price Controls: a. Price Ceilings b. Price Floors I. When Do Price Ceilings Matter? 1. Price Controls – an attempt to set prices through government involvement in the  market a. Were meant to relieve burdens on society 2. Price Ceiling – creates a legally established maximum price for a good or service  A .    Understanding Price Ceilings 1. Black Markets – illegal market that arise when price controls are in place a. Ex. Prohibition 2. An Example of Price Ceilings Using a Situation a. Prices are rising because of inflation i. The government is now scared that people of lower incomes will not be  able to afford food ii. To compensate for this, the government changes the price of loaves of  bread to $.50 iii. The quantity demanded will now increase (there will be longer lines) and  the quantity supplied will decrease (suppliers will not have enough money to produce more)  B .    The Effect of Price Ceiling 1. 2 Types of Price Ceilings: a. Nonbinding b. Binding  Nonbinding Price Ceiling 1. Nonbinding Price Ceiling – price ceiling that is above the  equilibrium price a. Ex. prices at or below the price ceiling are legal i. Above the price ceiling = illegal 2. Does not influence the market 3. As long as the equilibrium price remains below the price ceiling,  price will continue to be regulated by supply and demand 4. Nonbinding price ceilings are unusual  Binding Price Ceiling 1. Binding Price Ceiling – exists below the market price a. It creates a binding constraint that prevents the supply and demand from  clearing the market 2. Market cannot reach the equilibrium price because it is above the price ceiling 3. Can cause a shortage, but the shortage can’t even cause prices to rise because of the  price ceiling 4. Black market prices rely on supply and demand, too. a. Illegal markets will enter the market to resolve the shortage b. They will sell goods at illegal prices which result in two unintended  consequences i. Smaller quantity of supply ii. A higher price for those forced to purchase on the black market  C .    Price Ceilings in the Long Run 1. When binding price ceilings are in effect in the short run, shortages and  black markets develop 2. Increased elasticity on the part of both producers and consumers  magnifies the unintended consequences in the short run 3. Producers subject to a price ceiling become progressively harder to find  in the long run 4. Overall, price ceilings and the shortages that they create can only get  worse II. What Effects Do Price Ceilings Have on Economic Activity? 1. 2 Real World Price Ceilings: a. Rent control b. Price gouging laws  A .    Rent Control 1. Rent Control – a local government caps the price of apartment rentals to keep housing affordable 2. DOES NOT work! a. Does not help poor residents b. Contributes to dangerous living conditions 3. Emergency Price Control Act (1943, during WWII) a. Designed to keep inflation in check during the war, when many essential  commodities were scarce 4. Causes a shortage because we have “well­off” people taking these rental homes and  using them as “vacation homes” a. Quantity demanded is greater than quantity supplied  B .    Price Gouging 1. Price Gouging – places a temporary ceiling on the prices that sellers can change on  the prices that sellers can change during times of national emergency until markets  function normally again a. Over 30 states in the United States have laws against price gouging i. Ex. Florida makes it illegal to charge an ‘excessive’ price immediately  following a natural disaster because it prevents victims from being  exploited 2. Prices act to ration resources a. When the demand for necessities is high, the price rises to ensure that the  available units are distributed to those who value them the most i. HOWEVER, this is contradictory because does this mean that rich  people value these resources more? Or are they more capable of  acquiring these resources? 3. Legislation rely on the goodwill of others and the slow moving of machinery of  government relief efforts a. Closes off entrepreneurial activity to alleviate poor conditions


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