Chapt 3 (Price Controls) Elasticity To A Govt

Question 1

Define price ceiling

Answer 1

Price ceiling is a legally established maximum price.
- It is effective when set below market equilibrium price.

Purpose
- Keeps price of essential goods affordable for lower income
- Avoid exploitation by producers who may charge very high prices during shortages

Question 2

Define price floor

Answer 2

Price floor is a legally established minimum price.
Effective if set above market price

Question 3

Affect of price ceiling on P and Q

Answer 3

• price falls, QD rises
• Shortage occurs unintended
  _
• BUT price ceiling prevents price adjustment process from occurring
• so supply remains at Q0
• Quantity supplied is only Q0 amount of goods at price Pc

Question 4

Consequences of shortage due to price ceiling

1. Formation of black markets

Answer 4

• At low supply/output Q₀, consumers will be willing and able to pay much more
• P_{BM</ is vertically above Q0, on demand curve}
• bcuz Consumers may be unable to secure goods
• Shortages entice consumers to illegally offer price above price ceiling

Question 5

Define black market

Answer 5

Black markets exchange goods at prices above the legally established maximum price ceiling
- Goods/services are traded illegally

Question 6

Summary of Consequences of shortage due to price ceiling

Answer 6

1. Formation of black markets
2. Queueing
3. Panic buying
4. Rationing

Question 8

Effect of price ceiling on allocative efficiency

Question 10

2 Objectives of price floor

Answer 10

1. Prevent exploitation of workers through unfair wages
2. Protect farmers from glut in agriculture market (farmers can sell goods at higher price)

Question 11

Effect of price floor on price & quantity

Answer 11

• Price rises
• Quantity demanded falls, quantity supplied rises
• Quantity traded falls to Q1 at price Pf (price floor)
• Surplus occurs