the binding price ceiling
ceiling price and floor price
demand & supply
demand and supply in economics
demand economics
an effective price ceiling
effects of a price ceiling
effects of price control
floor price and ceiling price
freeze price
government controlled prices cause
government price controls
a minimum price ceiling
price cap
price ceiling
price ceiling and floor
price ceiling and price floor
price ceiling economics
price ceiling graph
price ceiling in economics
price control
price control policy
price control system
price controls economics
price floor and price ceiling
supply and demand
2. Supply, Demand, and Government Policies
In a free, unregulated market system, market
forces establish equilibrium prices and
exchange quantities.
While equilibrium conditions may be efficient,
it may be true that not everyone is satisfied.
One of the roles of economists is to use their
theories to assist in the development of
policies.
3. Price Controls...
Are usually enacted when
policymakers believe the market price
is unfair to buyers or sellers.
Result in government-created price
ceilings and floors.
4. Price Ceilings & Price Floors
Price Ceiling
A legally established maximum price at which a
good can be sold.
Price Floor
A legally established minimum price at which a
good can be sold.
5. Price Ceilings
Two outcomes are possible when the
government imposes a price ceiling:
The price ceiling is not binding if set above the
equilibrium price.
The price ceiling is binding if set below the
equilibrium price, leading to a shortage.
6. A Price Ceiling That Is Not Binding...
$4
3
Quantity of
Ice-Cream
Cones
0
Price of
Ice-Cream
Cone
Demand
Supply
Price
ceiling
Equilibrium
price
100
Equilibrium
quantity
7. A Price Ceiling That Is Binding...
$3
Quantity of
Ice-Cream
Cones
0
Price of
Ice-Cream
Cone
2
Demand
Supply
Equilibrium
price
Price
ceiling
Shortage
125
Quantity
demanded
75
Quantity
supplied
8. Effects of Price Ceilings
A binding price ceiling creates ...
… shortages because QD > QS.
Example: Gasoline shortage of the 1970s
… nonprice rationing
Examples: Long lines, Discrimination by
sellers
9. Lines at the Gas Pump
In 1973 OPEC raised the price of
crude oil in world markets. Because
crude oil is the major input used to
make gasoline, the higher oil prices
reduced the supply of gasoline.
What was responsible for the long
gas lines?
Economists blame government
regulations that limited the price oil
companies could charge for gasoline.
10. The Price Ceiling on Gasoline Is Not Binding...
$4
P1
Quantity of
Gasoline
0
Price of
Gasoline
Q1
Demand
Supply
Price
ceiling
1. Initially,
the
price ceiling
is not
binding...
11. The Price Ceiling on Gasoline Is Binding...
P1
Quantity of
Gasoline
0
Price of
Gasoline
Q1
Demand
S1
Price
ceiling
S2 2. …but
when supply
falls...
P2
3. …the price
ceiling
becomes
binding...
4. …resulting
in a shortage.
12. Rent Control
Rent controls are ceilings placed on the
rents that landlords may charge their
tenants.
The goal of rent control policy is to help
the poor by making housing more
affordable.
One economist called rent control “the
best way to destroy a city, other than
bombing.”
13. Rent Control in the Short Run...
Quantity of
Apartments
0
Rental
Price of
Apartmen
t
Demand
Supply
Controlled rent
Shortage
Supply and
demand for
apartments
are relatively
inelastic
14. Rent Control in the Long Run...
Quantity of
Apartments
0
Rental
Price of
Apartmen
t
Demand
Supply
Controlled rent
Shortage
Because the
supply and
demand for
apartments are
more elastic...
…rent control
causes a large
shortage
15. Price Floors
When the government imposes a
price floor, two outcomes are
possible.
The price floor is not binding if set below
the equilibrium price.
The price floor is binding if set above the
equilibrium price, leading to a surplus.
16. A Price Floor That Is Not Binding...
$3
Quantity of
Ice-Cream
Cones
0
Price of
Ice-Cream
Cone
100
Equilibrium
quantity
Equilibrium
price
Demand
Supply
Price
floor
2
17. A Price Floor That Is Binding...
$3
Quantity of
Ice-Cream
Cones
0
Price of
Ice-Cream
Cone
Equilibrium
price
Demand
Supply
Price floor$4
120
Quantity
supplied
80
Quantity
demanded
Surplus
18. Effects of a Price Floor
A price floor prevents supply and
demand from moving toward the
equilibrium price and quantity.
When the market price hits the
floor, it can fall no further, and the
market price equals the floor price.
19. Effects of a Price Floor
A binding price floor causes . . .
… a surplus because QS >QD.
… nonprice rationing is an alternative
mechanism for rationing the good, using
discrimination criteria.
Examples: The minimum wage, Agricultural price
supports
20. The Minimum Wage
An important example of a
price floor is the minimum
wage. Minimum wage laws
dictate the lowest price
possible for labor that any
employer may pay.
21. The Minimum Wage
Quantity of
Labor
0
Wage
Equilibrium
wage
Labor
demand
Labor
supply
A Free Labor Market
Equilibrium
employment
22. Minimum
wage
The Minimum Wage
Quantity of
Labor
0
Wage
Labor
demand
Labor
supply
Quantity
supplied
Quantity
demanded
Labor surplus
(unemployment)
A Labor Market with a
Minimum Wage
24. What are some potential impacts of
taxes?
Taxes discourage
market activity.
When a good is taxed,
the quantity sold is
smaller.
Buyers and sellers
share the tax burden.
25. Taxes
Tax incidence is the study of who
bears the burden of a tax.
Taxes result in a change in market
equilibrium.
Buyers pay more and sellers receive
less, regardless of whom the tax is
levied on.
26. Impact of a 50¢ Tax Levied on Buyers...
3.00
Quantity of
Ice-Cream Cones
0
Price of
Ice-Cream
Cone
100
D1
Supply, S1
A tax on buyers
shifts the demand
curve downward
by the size of
the tax ($0.50).
D2
27. 3.00
Quantity of
Ice-Cream Cones
0
Price of
Ice-Cream
Cone
10090
$3.30
Price
buyers
pay
D1
D2
Equilibrium
with tax
Supply, S1
Equilibrium without tax
Impact of a 50¢ Tax Levied on Buyers...
2.80
Price
sellers
receive
Price
without
tax
Tax
($0.50)
28. What was the impact of tax?
Taxes discourage
market activity.
When a good is taxed,
the quantity sold is
smaller.
Buyers and sellers
share the tax burden.
29. 3.00
Quantity of
Ice-Cream Cones
0
Price of
Ice-Cream
Cone
10090
S1
S2
Demand, D1
Impact of a 50¢ Tax on Sellers...
Price
without
tax
2.80
Price
sellers
receive
$3.30
Price
buyers
pay
Equilibrium without tax
A tax on
sellers shifts
the supply
curve upward
by the amount
of the tax
($0.50).
Tax
($0.50)
Equilibrium
with tax
30. A Payroll Tax
Quantity of
Labor
0
Wage
Wage
without tax
Labor
demand
Labor
supply
Tax wedge
Wage firms
pay
Wage workers
receive
31. The Incidence of Tax
In what proportions is the burden of
the tax divided?
How do the effects of taxes on sellers
compare to those levied on buyers?
The answers to these questions
depend on the elasticity of demand
and the elasticity of supply.
32. Elastic Supply, Inelastic Demand...
Quantity0
Price
Demand
Supply
Tax
1. When supply is more
elastic than demand...
2. ...the
incidence of the
tax falls more
heavily on
consumers...
3. ...than on
producers.
Price without tax
Price buyers pay
Price sellers receive
33. Inelastic Supply, Elastic Demand...
Quantity0
Price
Demand
Supply
Price without tax
Tax
1. When demand is more
elastic than supply...
2. ...the
incidence of
the tax falls more
heavily on producers...
3. ...than on consumers.
Price buyers pay
Price sellers receive
34. So, how is the burden of the tax
divided?
The burden of a tax
falls more heavily
on the side of the
market that is less
elastic.
35. Summary
Price controls include price ceilings and
price floors.
A price ceiling is a legal maximum on
the price of a good or service. An
example is rent control.
A price floor is a legal minimum on the
price of a good or a service. An
example is the minimum wage.
36. Summary
Taxes are used to raise revenue for
public purposes.
When the government levies a tax on a
good, the equilibrium quantity of the
good falls.
A tax on a good places a wedge
between the price paid by buyers and
the price received by sellers.
37. Summary
The incidence of a tax refers to who
bears the burden of a tax.
The incidence of a tax does not
depend on whether the tax is levied
on buyers or sellers.
The incidence of the tax depends on
the price elasticities of supply and
demand.
39. A Price Ceiling That Is Not Binding...
$4
3
Quantity of
Ice-Cream
Cones
0
Price of
Ice-Cream
Cone
Demand
Supply
Price
ceiling
Equilibrium
price
100
Equilibrium
quantity
40. A Price Ceiling That Is Binding...
$3
Quantity of
Ice-Cream
Cones
0
Price of
Ice-Cream
Cone
2
Demand
Supply
Equilibrium
price
Price
ceiling
Shortage
125
Quantity
demanded
75
Quantity
supplied
41. The Price Ceiling on Gasoline Is Not Binding...
$4
P1
Quantity of
Gasoline
0
Price of
Gasoline
Q1
Demand
Supply
Price
ceiling
1. Initially,
the
price ceiling
is not
binding...
42. The Price Ceiling on Gasoline Is Binding...
P1
Quantity of
Gasoline
0
Price of
Gasoline
Q1
Demand
S1
Price
ceiling
S2 2. …but
when supply
falls...
P2
3. …the price
ceiling
becomes
binding...
4. …resulting
in a shortage.
43. Rent Control in the Short Run...
Quantity of
Apartments
0
Rental
Price of
Apartmen
t
Demand
Supply
Controlled rent
Shortage
Supply and
demand for
apartments
are relatively
inelastic
44. Rent Control in the Long Run...
Quantity of
Apartments
0
Rental
Price of
Apartmen
t
Demand
Supply
Controlled rent
Shortage
Because the
supply and
demand for
apartments are
more elastic...
…rent control
causes a large
shortage
45. A Price Floor That Is Not Binding...
$3
Quantity of
Ice-Cream
Cones
0
Price of
Ice-Cream
Cone
100
Equilibrium
quantity
Equilibrium
price
Demand
Supply
Price
floor
2
46. A Price Floor That Is Binding...
$3
Quantity of
Ice-Cream
Cones
0
Price of
Ice-Cream
Cone
Equilibrium
price
Demand
Supply
Price floor$4
120
Quantity
supplied
80
Quantity
demanded
Surplus
47. The Minimum Wage
Quantity of
Labor
0
Wage
Equilibrium
wage
Labor
demand
Labor
supply
A Free Labor Market
Equilibrium
employment
48. The Minimum Wage
Minimum
wage
Quantity of
Labor
0
Wage
Labor
demand
Labor
supply
Quantity
supplied
Quantity
demanded
Labor surplus
(unemployment)
A Labor Market with a
Minimum Wage
49. Impact of a 50¢ Tax Levied on Buyers...
3.00
Quantity of
Ice-Cream Cones
0
Price of
Ice-Cream
Cone
100
D1
Supply, S1
A tax on buyers
shifts the demand
curve downward
by the size of
the tax ($0.50).
D2
50. Impact of a 50¢ Tax Levied on Buyers...
3.00
Quantity of
Ice-Cream Cones
0
Price of
Ice-Cream
Cone
10090
$3.30
Price
buyers
pay
D1
D2
Equilibrium
with tax
Supply, S1
Equilibrium without tax
2.80
Price
sellers
receive
Price
without
tax
Tax
($0.50)
51. Impact of a 50¢ Tax on Sellers...
3.00
Quantity of
Ice-Cream Cones
0
Price of
Ice-Cream
Cone
10090
S1
S2
Demand, D1
Price
without
tax
2.80
Price
sellers
receive
$3.30
Price
buyers
pay
Equilibrium without tax
A tax on
sellers shifts
the supply
curve upward
by the amount
of the tax
($0.50).
Tax
($0.50)
Equilibrium
with tax
52. A Payroll Tax
Quantity of
Labor
0
Wage
Wage
without tax
Labor
demand
Labor
supply
Tax wedge
Wage firms
pay
Wage workers
receive
53. Elastic Supply, Inelastic Demand...
Quantity0
Price
Demand
Supply
Tax
1. When supply is more
elastic than demand...
2. ...the
incidence of the
tax falls more
heavily on
consumers...
3. ...than on
producers.
Price without tax
Price buyers pay
Price sellers receive
54. Inelastic Supply, Elastic Demand...
Quantity0
Price
Demand
Supply
Price without tax
Tax
1. When demand is more
elastic than supply...
2. ...the
incidence of
the tax falls more
heavily on producers...
3. ...than on consumers.
Price buyers pay
Price sellers receive