Chapter 5- Price Controls

Question 1

Price Ceiling

Answer 1

price ceiling- the maximum amount under law suppliers can charge for a good, below market price
5 effects
shortages- quantity demanded is greater than quantity supplied, the lower the maximum price is compared to the market price the greater the shortage
reduction in quality- reduce quality/service so sellers can make more of a good
wasteful lines/bribes- buyers either compete with bribes or their willingness to wait in lines
lost gains- price controls reduce gains from trade, deadweight loss(total of lost producer and consumer surplus when not all mutually beneficial trades are made), consumer and producer surplus not maximized
misallocation of resources- eliminates incentives for sellers, no way for buyers to show their willingness to pay, sellers won’t meet their demand

Question 2

Price Floors

Answer 2

price floor- the minimum price for a supply

effects- surplus, too high quality, misallocation, lost gains from trade