Chapter 6 (2) Flashcards
PRICE CONTROL
a regulation that sets a maximum / minimum legal price for a particular good
► The direct effect of a price control = to hold the price of a good up / down when the market shifts –> thus preventing the market from reaching a new equilibrium
(2) [opposing] CATEGORIES OF PRICE CONTROLS:
- PRICE CEILINGS
2. PRICE FLOOR
PRICE CEILINGS
A maximum legal price at which a good can be sold.
► Typically placed on essential goods and services such as food, gasoline, and electricity.
Example, tortillas (pg. 172), add more notes
► Lower price –> fewer producers = willing to sell tortillas
DEAD WEIGHT LOSS
represents the loss of total surplus that occurs b/c the quantity of a good bought & sold = below the market equilibrium quantity
PRICE FLOOR
A minimum legal price at which a good can be sold.
► Typically placed on agricultural goods –> considering that farming is risky business–subject to bad weather, crop failure, and unreliable prices (but also an essential one, if people are to have enough to eat)
► Seen as a way to guarantee farmers a minimum income in the face of these difficulties –> keeping them in business & ensuring a reliable supply of food
Example, milk (pg. 175)
► under the supply management system
–> price is regulated at the retail & wholesale stages
► Sets price as a benchmark
► as a result, the price floor = creates an excess quantity supplied of milk that is EQUAL to the difference between the quantity supplied & the quantity demanded
Price floor (Cont).
Yes and No.
► Producers who CAN sell their milk = happy –> b/c they are selling more milk at a higher price.
► Producers who CANNOT sell all their milk b/c demand no longer meets supply = unhappy;
-Customers = unhappy b/c they are getting less milk at a higher price
like price ceilings, price floors = change the distribution of surplus . . .
► but in this case producers = win at the expense of consumers
► when the price floor = in effect the ONLY consumers who buy = those whose willingness to pay = above $3 a litre (benchmark)
Their consumer surplus falls (buying the same milk at a higher price) –> and their lost surplus = transferred directly to the producers who sell milk to them
○ Whether producers = gain / lose overall will depend on whether their producer surplus area = bigger or smaller than their share of the dead weight loss
○ Producers who are UNABLE to sell ALL of their goods = left holding excess quantity supplied
► They may be worse off than before the imposition of the price floor
–> w/ excess quantity supplied –> customers = may choose to buy from firms they like based on familiarity, political preference, or any other decision-making process they choose
to prevent some producers from being left in the lurch
► the gov’t = may decide to buy up all the excess quantity supplied of milk –> ensuring ALL producers benefit
► Imposes a cost on taxpayers; an argument against price floor.
price floor = not always binding.
May become binding –> however in response to changes in the market read pg. 178
