...This essay will critically discuss how price ceilings and floors could possibly lead to economic inefficiency causing surpluses or shortages in relation to graphs and the real world case study. Firstly, price ceilings and price floors are basic aspects of our economy. Government enacted laws used to prevent suppliers from establishing prices of resources higher than supposed to be are known as price ceilings. Price floors are minimum pricing rates that can be charged for a particular good or service. Price controls such as these two are used to maintain affordable lifestyles and to protect consumers from suffering from unfair inflation. But however, if not executed correctly, price controls become completely ineffective. In order for a price ceiling to be effective price ceilings must be set below the natural market equilibrium but this in return becomes a problem the outcome of that would result in either excess in demand or a shortage in supply (Taylor 2006). Producers will not produce as much at a lower pricing rate, while consumers will continue to demand more because of the good being made more affordable; demand will exceed the supply. But still if the demand curve is relatively elastic then the net effect to consumer surplus will be positive. Producers are definitely harmed, as their surplus is doubly hit with a reduction in the number of firms that are willing to take the lower pricing rates. Resulting shortages of goods or services can lead to consumers having to line...
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...shows the equilibrium price and quantity of computers in the marketplace. The equilibrium is where the price and demand meet. For the graph above it is 1750 units and a price of $125. If left alone a market would naturally settle into equilibrium. With the market equilibrium price it ensures that the sellers willing to sell at that price and the buyers willing to buy at that price will get what they want. At equilibrium supply equals demand but in some cases the government will interfere with the market adding taxes, price ceilings and price floors. We will take a look at what happens to the market when these occur. First we will look at what would happen if the government imposes a special tax on these computers. If the government interferes with a taxation it would then force the sellers to raise their prices for those computers because the sellers want to maintain their profit margin. The supply curve would shift upwards by whatever the tax amount is. Sellers would sell less computers and if buyers still want these computers they will need to spend more for them because of the tax and the fact that since they now cost more and there would be less to sell. Sometimes governments impose a price ceiling which is an upper limit for the price of the computers, when a price ceiling has been implemented sellers cannot charge more than the ceiling price. If the ceiling is set at or above market price there will be no noticeable effect and the ceiling is only a preventative...
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...Businesses have methods by which to price their products and services. Value-based pricing and cost-based pricing are two common strategies companies use to promote goods and services. Setting the right prices is the key to effective marketing as well as to long-term profitability. Both of these approaches have strengths and weaknesses relative to the other. When a company uses cost-based pricing, the company sets a price at a percentage above the cost it incurs to manufacture the product or to provide the service. Value-based pricing takes a different approach, considering the potential value the product or service will bring to its customers. Value-Based Pricing A value-based pricing company considers the value of its product or service, as opposed to the cost the company incurred to create and produce it. To do this, the company determines how much money or values its product or service will generate for the customer. This value could originate from factors such as increased efficiency, happiness or stability. Companies or individuals that produce medications, chemicals and computer programs and software and artwork often use this pricing strategy. Cost-Based Pricing Cost-based pricing uses manufacturing or production costs as its basis for pricing. The cost-based pricing company uses its costs to find a price floor and a price ceiling. The floor and the ceiling are the minimum and maximum prices for a specific product or service; they serve as a price range. If the market conditions...
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...Chapter 6 Supply, Demand, and Government Policies MULTIPLE CHOICE 1. Price controls are a. used to make markets more efficient. b. usually enacted when policymakers believe that the market price of a good or service is unfair to buyers or sellers. c. nearly always effective in eliminating inequities. d. established by firms with monopoly power. ANSWER: b. usually enacted when policymakers believe that the market price of a good or service is unfair to buyers or sellers. TYPE: M DIFFICULTY: 2 2. Policymakers choose to enact price controls in a market because a. they believe the market’s outcome to be unfair. b. enacting price controls will directly increase tax revenues. c. they are required by law to improve market conditions. d. they believe that the market system is inefficient and their actions will improve efficiency. ANSWER: a. they believe the market’s outcome to be unfair. TYPE: M SECTION: 1 DIFFICULTY: 2 3. Policymakers are led to control prices because a. they view the market’s outcome as inefficient. b. they view the market’s outcome as unfair. c. all politicians enjoy exercising their power. d. they are required to do so under the Employment Act of 1946. ANSWER: b. they view the market’s outcome as unfair. TYPE: M SECTION: 1 DIFFICULTY: 2 4. Price controls a. always produce an equitable outcome. b. always produce an efficient outcome...
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...Effects of government action This chapter provides the following information in regards to how governments influence the economy. In it, we will look into depth about price ceilings and floors, and how they affect the markets. As well as price supports in agriculture. Then we will look at discussion on taxes, from income tax to fairness and tradeoff. When we reviewed price ceilings, it particularly discussed rent ceilings. Rent ceilings are a regulation that makes it illegal to charge more than a specified rent for housing. So if a rent ceiling was set above the equilibrium price, it wouldn’t do much because people are already paying that price range. But when it is below the equilibrium price, which is when there are very extreme effects. So with a rent ceiling is below, you will begin to have housing shortages, which in turn opens up black markets, and increases search activities. So the question of rent ceiling efficiency is answered, if there were no ceilings, then the market forces would determine its own equilibrium rent, thus the quantity demanded would equal supplied. But with a rent ceiling in place, the outcome would be inefficient as the marginal benefit would exceed marginal cost, and deadweight loss arises. We move on to price floors, where government regulation places a lower limit on which a particular good or service may be traded. Anything lower would be illegal. A good example provided in this chapter is the minimum wage law. The whole aim is to boost...
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...illustrating the supply and demand in this market Q2. What is the equilibrium Price and Quantity in the market? The equilibrium is at the intersection of the demand and supply curves, i.e. when demand equals supply. From the chart, we can see that the equilibrium is at P=$125 and Q=1750. Q3. Now suppose the government imposes a special tax on these computers. Describe what would happen in this market in terms of the supply and demand curve. Price/Computer | Quantity Demanded after tax | Price/Computer | Quantity Supplied | $175 | 1000 | $200 | 2200 | 150 | 1250 | 175 | 2050 | 125 | 1500 | 150 | 1900 | 100 | 1750 | 125 | 1750 | 75 | 2000 | 100 | 1600 | 50 | 2250 | 75 | 1450 | 25 | 2500 | 50 | 1300 | 0 | 2750 | 25 | 1150 | Once a tax is imposed, let us assume on the buyer, then the buyer perceives to pay a higher price at each level of Q. Thus the demand curve shifts to the left for the seller. The seller perceives that the demand curve is effectively the new demand curve since the buyers would account for the tax. At the new equilibrium, the quantity is determined at the intersection of the new demand curve and the original supply curve. However the price paid by the buyers is determined off the original demand curve, at the above determined quantity. The price received by sellers is at the intersection of new demand curve and supply curve. The difference in prices represents the tax. Similarly, the tax shifts the supply curve, when the tax is...
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...Introduction To start this paper let me drive you to what we mean by price ceiling and demand then compare it with another term “price floor” with similar application but opposing meaning. First let us understand the economic meaning of demand which is said to be the total buyers who are willing and able to buy the commodities in a market while Taylor, mentions that Price ceiling is described as a situation where the government sets a legitimate upper price limit or a point where a commodity price is not supposed to go above (2006). For price ceiling to be effective it should be applied at a point lower than that offered by normal market equilibrium point i.e. where the market forces places the price. Price floor is formed as a result of price control mechanism by the government as well as price ceiling but it is distinguished from price ceiling such that it occurs where the government sets a limit below which a commodity cannot be sold i.e. the lowest price that the product should be sold in the market. This way the market freedom of defining its equilibrium price and quantity is interfered where this price control apparatus are applied i.e. price ceiling and price floor affects the normal operating mechanism of the market. In the case of price ceiling the most common problem is shortages in the market as more is demanded due to low prices as opposed to the supply where less is made available. This approach of price ceiling has led to other problems in the economy such as black markets...
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...markets simultaneously, recognizing the interactions among the various markets. At any disequilibrium price, quantity exchanged is determined by the lesser of quantity demanded or quantity supplied. Price floors – the minimum permissible price that can be charged for a particular good or service. Binding price floors lead to excess supply. Either an unsold surplus will exist, or someone (usually government) must enter the market and buy the excess supply. Price ceilings – the maximum price at which certain good and services may be exchanged. Binding price ceilings lead to excess demand, which the quantity exchanged being less than in the free-market equilibrium. Three of the goals that governments often have when imposing a price ceiling. - To restrict production - To keep specific prices down - To satisfy notions of equity in the consumption of a product that is temporarily in short supply. To the extent that binding price ceilings give rise to a black market, it is likely that the government’s objectives motivating the imposition of the price ceiling will be thwarted. For each unit of a product, the price on the market demand curve shows the value to consumers from consuming that unit. For each unit of a product, the price on the market supply curve shows the lowest acceptable price to firms for selling that unit. This lowest acceptable price reflects the additional cost to firms from producing that unit. For any given quantity of a product, the...
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...influenced by political pressure groups. Furthermore, government intervention might also create excess bureaucracy and inefficiency when they spend on public and merit goods. As mentioned earlier in this paper, government intervention can be very helpful when the market fails. Without any government intervention, many people in the society can be negatively affected. An example would be the overconsumption of products with negative externalities which is the result of demerit goods. The government can intervene by setting a minimum age for consumption and even hold information campaigns to raise awareness. Government intervention is also necessary when prices of goods and services are rising to protect the consumers and when they're falling to protect the producers. Without the implementation of a price floor or price ceiling, prices might rise too high or fall too low which will have an adverse effect on many people. Although government intervention is necessary most of the times, there are times when it should be avoided. Such interventions shouldn't be necessary if the market is running smoothly and both the consumers and producers are satisfied with the benefits gained from the trade. Unnecessary interventions might lead to a deadweight loss and economic inefficiency. When government intervention isn't present, strong judiciary is still necessary to ensure...
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...cover variable costs. 3. Answer: B. Its variable costs. 4. Answer: A. Diminishing returns to a fixed factor. 5. Answer: A. Average cost is equal to average revenue. 6. Answer: B. The difference between total cost and total revenue is greatest. 7. Answer: D. Average cost is minimized 3 . 8. Answer: D. A lower price for the good. 9. Answer: B. A means of ensuring a fair distribution of incomes. 10. Answer: C. Large shifts in supply with perfectly price elastic demand. 11. Answer: C. The goods are complements. 12. Answer: C. Reduce total revenue by $25,000. 13. Answer: B. A decrease in demand, an extension of supply and a market surplus. 14. Answer: B. The demand is price elastic and the supply is price elastic. 15. Answer: D. Provide a subsidy for the consumers of the product. 16. Answer: B. A price fall for a good will lead to an increase in demand for that good. 17. Answer: A. Shortages or surpluses. 18. Answer: B. It would reduce the imports of oil. 19. Answer: B. Reduce the equilibrium price and increase the output. 20. Answer: A. The market mechanism fails to take account of externalities. Part II: Short answers 1. Answer: If we print more money the economy will face inflationary problem. 2. Answer: The average cost of production for output 11 is TK 24. 3. Answer: A. In case of consumer...
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...is the equilibrium Price and Quantity in the market? This is where the quantity demanded and the quantity supplied are equal. The corresponding price is the equilibrium price and the quantity is the equilibrium quantity. *Let us take the first line of data from the Spreadsheet as an example: Price- $200 Quantity Demanded- 1000 Quantity Supplied- 2200 Here there is an excess supply amount, so there are more computers than that are actually wanted. At this point, the sellers would recognize there are fewer buyers for their product at the current set price. Now they would attempt attracting buyers for the excess supply available by offering these goods at a lower price. By doing so, according to the law of demand, buyers will now purchase more of the computers and the supply overage will decrease until it eventually disappears. Now the market will reach the intersection point in which supply is equal to demand. *Now we can look at a different scenario in which the demand of computers are higher than the supply. Looking at the last line of data from the Spreadsheet: Price- $25 Quantity Demanded- 2750 Quantity Supplied-1150 This would display a price that is below the intersection point. Because there is such a high demand for the product, the consumer would be willing to pay more to obtain it. As the market price increases, the demand will decrease and will eventually cease at the intersection of the two curves, thus reaching Market equilibrium price. 3. Now suppose...
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...Technical economies- is found when a cost of a product does not match the size of the product for e.g doubling the price of a crate does not mean the price should increase. 2. Purchasing economies- when huge firms achieve the privilege of buying bulk to bulk to obtain purchasing discounts. E.g. a massive supermarket like Price Smart can buy large cases of cereal in much greater quantities than a small quantities of a small grocery or shop. 3. Administrative economies- arise because the same people can usually manage with massive output, so the moderate administrative cost decreases when production increases. These Large firms can employ technicians, which would assist in the increase the firm’s productivity. 4. Marketing economies- these large firms budget cost is lesser for the large firms when dealing with the promotion and advertising, the cost, this enjoyment cant e experienced by small firms. Also selling the good they would get huge discounts when comes...
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...Businesses have methods by which to price their products and services. Value-based pricing and cost-based pricing are two common strategies companies use to promote goods and services. Setting the right prices is the key to effective marketing as well as to long-term profitability. Both of these approaches have strengths and weaknesses relative to the other. When a company uses cost-based pricing, the company sets a price at a percentage above the cost it incurs to manufacture the product or to provide the service. Value-based pricing takes a different approach, considering the potential value the product or service will bring to its customers. Value-Based Pricing A value-based pricing company considers the value of its product or service, as opposed to the cost the company incurred to create and produce it. To do this, the company determines how much money or values its product or service will generate for the customer. This value could originate from factors such as increased efficiency, happiness or stability. Companies or individuals that produce medications, chemicals and computer programs and software and artwork often use this pricing strategy. Cost-Based Pricing Cost-based pricing uses manufacturing or production costs as its basis for pricing. The cost-based pricing company uses its costs to find a price floor and a price ceiling. The floor and the ceiling are the minimum and maximum prices for a specific product or service; they serve as a price range. If the market conditions...
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...Price Ceiling is a legal maximum on the price of a good or service. If the price ceiling is above the equilibrium then it is not binding and consumers would demand a smaller quantity than suppliers are producing. If the price ceiling is set below the equilibrium then it is a binding constraint and a "shortage" is created; the quantity demanded will exceed the quantity supplied. The shortage may be resolved in many ways. One way is to have people wait in line for the product, and only those willing to wait in line for the product will actually get it. Sellers might provide the product only to family and friends, or those willing to pay extra "under the table". Another effect may be that sellers will lower the quality of the good sold. Price Floor is a legal minimum on the price of a good or service. When a price floor is set, a certain minimum amount must be paid for a good or service. If the price floor is below the equilibrium then it’s not binding. If the price floor is above the equilibrium then it causes a binding constraint. Minimum wage laws are good examples of price floors. In many states, the U.S. minimum wage law has no effect, as market wage rates for low skilled workers are above the U.S. minimum wage rate. In states where the minimum wage is above the market wage rate, the law will increase unemployment for low skilled workers. Although some low skilled workers will get higher pay, others will lose their jobs. Taxes are something we are all familiar with and...
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...government establishes a price ceiling of $3.70 for wheat. What might prompt the government to establish this price ceiling? Explain carefully the main effects. Demonstrate your answer graphically. Next, suppose that the government establishes a price floor of $4.60 for wheat. What will be the main effects of this price floor? Demonstrate your answer graphically. LO5 Answer: The equilibrium price is found where quantity supplied equals quantity demanded. This occurs at the price of $4.00 where 75 thousand bushels are demanded and 75 thousand bushels are supplied (equilibrium quantity). If the government establishes a price ceiling at $3.70 (sellers cannot charge a price above $3.70), there will be an excess demand of 7 thousand bushels. Buyers demand 80 thousand bushels at the price of $3.70, but sellers only supply 73 thousand bushels. If the government establishes a price floor at $4.60 (sellers cannot charge a price below $4.60), there will be an excess supply of 14 thousand bushels. Buyers demand 65 thousand bushels at the price of $4.60, but sellers supply 79 thousand bushels. surplus: $4.60 surplus: $4.60 12. What do economists mean when they say “price floors and ceilings stifle the rationing function of prices and distort resource allocation”? LO5 Answer: When unrestrained, prices rise and fall to correct imbalances between the quantity supplied and quantity demanded in a market. If sellers find themselves at a given price with more output than consumers...
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