Effect of Price Floor and Ceiling On Agriculture

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Effect of Price Floor and Ceiling On Agriculture

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  • Instructor Notes: Figure 6.1: Price Ceilings Create Shortages
    At the controlled price, the quantity demanded exceeds the quantity supplied, creating a shortage.
    It should be noted that price is not allowed to rise to eliminate the shortage as would be the case in a free market.
  • Instructor Notes:
  • Instructor Notes:
  • Instructor Notes: Figure 6.2: Price Ceilings Create Wasteful Lines
    At Qsupplied the willingness to pay is greater than the controlled price. The difference between what buyers are willing to pay and what sellers can charge encourages buyers to line up to buy the good. Buyers will lineup until the total price of the good, the out-of-pocket price plus the time cost, increases to the willingness to pay. Time spent waiting in line is wasted time. The total value of the wasted time is given by the time cost per unit multiplied by the quantity bought.
  • Instructor Notes:
  • Instructor Notes: It may be necessary to remind students of opportunity costs here. Wages are a good estimate of the opportunity cost of someone’s time.
  • Instructor Notes:
  • Instructor Notes:
  • Instructor Notes: Figure 6.3 Price Ceilings Reduce the Gains from Trade
    At quantities between Qsupplied and Qmarket, the willingness to pay is greater than the cost of production. Although mutually profitable, these trades are illegal. If all mutually profitable trades were legal, the gains from trade would increase by the green plus blue triangles.
    The lost gains from trade represent a dead-weight loss.
  • Instructor Notes: Figure 6.3 Price Ceilings Reduce the Gains from Trade
    At quantities between Qsupplied and Qmarket, the willingness to pay is greater than the cost of production. Although mutually profitable, these trades are illegal. If all mutually profitable trades were legal, the gains from trade would increase by the green plus blue triangles.
    The lost gains from trade represent a dead-weight loss.
  • Instructor Notes:
  • Effect of Price Floor and Ceiling On Agriculture

    1. 1. Effect of Price Floor and Ceiling on Agriculture and Petroleum Industry Submitted by: Imran Abdul Qadir (SP12-EX-0060) Shoaib Ahmed (SP 12-EX-0085) Imtiaz Sheikha (SP11-EX-0005) Muhammad Talha (SP11-EX-0004) Faisal Ashraf Ali (SP11-EX-0010) Submitted To: Mr. Shujaat Mubarak
    2. 2. INTRODUCTION In this presentation, we have highlighted the effect of price flooring and price ceiling on agriculture and petroleum sector. That whats effects occur on industry. This presentation consist bit introduction of price flooring and ceiling, then some related application alongwith effects indications.
    3. 3. Price Ceiling and Price Flooring   These are usually enacted when policymakers believe the market price is unfair to buyers or sellers. The government can enact   Price ceilings, and Price floors.
    4. 4.  Price ceilings that involve a maximum price below the market price create five important effects on industry. 1. 2. 3. 4. 5. Shortages Reduction in Product Quality Wasteful Lines and Other Costs of Search Loss of Gains from Trade Misallocation of Resources
    5. 5. (a) A Price Ceiling That Is Not Binding Price Supply 40 Price ceiling 33 Equilibrium price Demand 0 100 Equilibrium quantity Quantity
    6. 6. Price Ceilings Create Shortages Price Supply Market Equilibrium Shortage Controlled Price (Ceiling) Demand Quantity Qsupplied at the Controlled Price Qdemanded at the Controlled Price
    7. 7. 1. When prices are held below the market price shortages are created.   The shortage = difference between the Qd and the Qs at the controlled price. The lower the controlled price relative to the market equilibrium price, the larger the shortage.
    8. 8. (a) The Price Ceiling on product Is Not Binding Price Supply,S1 1.When, the price ceiling is not binding . . . Price ceiling P1 Demand 0 Q1 Qty
    9. 9. (b) The Price Ceiling Is Binding Price S2 2. . . . but when supply falls . . . S1 P2 Price ceiling 3. . . . the price ceiling becomes binding . . . P1 4. . . . resulting in a shortage. Demand 0 QS QD Q1 Quantity
    10. 10. 2. At the controlled price, sellers have more customers than goods.    In a free market, this would be an opportunity to profit by raising prices. But when prices are controlled, sellers cannot. Sellers respond to this problem in two ways:   Reduce quality Reduce service
    11. 11. Price Ceilings Create Wasteful Lines Price Supply Total Value of Wasted Time Time Cost Willingness to Pay Market Equilibrium Shortage Controlled Price (Ceiling) Demand Quantity Qsupplied at the Controlled Price
    12. 12. 3. Price controls that create shortages lead to bribery and wasteful lines.    Shortages: not all buyers will be able to purchase the good. Normally, buyers would compete with each other by offering a higher price. If price is not allowed to rise, buyers must compete in other ways.
    13. 13. Industry will not supply the best and result will be:   How I Can Supply you Petrol at low Profit margin.
    14. 14.  Dead-weight Loss is the total of lost consumer and producer surplus when all mutually profitable gains from trade are not exploited.  Price ceilings create a dead-weight loss by forcing Qs below the market Q.  Buyers and sellers would both benefit from trade at a higher price, but cannot since it is illegal for price to rise.
    15. 15. 4.    Price controls reduce the gains from trade. Price ceilings set below the market price cause Qs to be less than the market Q. When Q is below the equilibrium market Q, consumers value the good more than the cost of its production. This represents a gain from trade that would be exploited (if the market were free).
    16. 16. Price Ceilings Reduce the Gains from Trade Price Consumer Surplus Shrinks to this Producer Surplus Shrinks to this Willingness to Pay Market Price Supply Consumer surplus in market equilibrium Market Equilibrium Producer Surplus in equilibrium Controlled Price (Ceiling) Shortage Demand Quantity Qsupplied Qmarket Qdemanded
    17. 17. Deadweight Loss (lost gains from trade) = Lost Consumer Surplus + Lost Producer Surplus Supply Willingness to Pay Market Price Controlled Price (Ceiling) Total Value of Wasted Time Lost Consumer Surplus Market Equilibrium Lost Producer Surplus Shortage Demand Qsupplied Qmarket Qdemanded
    18. 18. 5. Price controls distort signals and eliminate incentives-- leading to a misallocation of resources.    Consumers who value a good most are prevented from signaling their preference (by offering sellers a higher price.) So producers have no incentive to supply the good to the “right” people first. As a result, goods are misallocated.
    19. 19. Price floor: a minimum price allowed by law.   not as common as price ceilings (but still important) Price floors have four common effects: 1. 2. 3. 4. Surpluses Lost gains from trade (deadweight loss) Wasteful increases in quality A misallocation of resources
    20. 20. (a) A Price Floor That Is Not Binding Price Supply Equilibrium price 33 Price floor 20 Demand 0 100 Equilibrium quantity Quantity
    21. 21. If the government sets a price floor for butter above the equilibrium market price, what will be the effect? a)Farmers will produce less butter and consumers will purchase more, resulting in a shortage of butter. b)The supply of butter will increase and the demand will decrease. c)Farmers will produce more butter and consumers will purchase less, resulting in a surplus of butter. d)The equilibrium price will rise to the price floor. 21
    22. 22. (b) A Price Floor That Is Binding Price Supply Surplus 40 Price floor 33 Equilibrium price Demand 0 80 120 Quantity Quantity demanded supplied Quantity
    23. 23.  A binding price floor causes . . .   a surplus, because quantity supplied is greater than quantity demanded. non-price rationing, which is an alternative mechanism for rationing the good, using discrimination criteria.  Examples: The minimum wage, agricultural support price and Royalties.
    24. 24. Rate Supply Equilibrium Wages / Royalties demand 0 Equilibrium Quantity
    25. 25. Rate Surplus of stock Minimum Wage Consequences: 1.Demand falls between 1 and 3 percent for every 10% increase in the minimum wage / support price Supply 2.The total income of consumer rises •Some consumer change their requirement •Opportunities for sale are reduced •A lot of them are from middle-class families demand 0 Quantity demanded Quantity supplied Quantity
    26. 26.  Price controls that create surpluses lead to wasteful increases in quality. Supply Price Deadweight Loss Controlled Price (Floor) “Quality” Waste Market Equilibrium Willingness to Sell Demand Quantity Qdemanded at the Controlled Price If they can’t lower price, sellers will find other ways to compete!
    27. 27.   The equilibrium quantity increases The price paid by buyers falls   The price received by sellers increases    So, buyers gain So, sellers gain too The total gain = the total subsidy Which side gains how much depends on the price elasticities of demand and supply 27
    28. 28.  Higher quality raises costs and reduces seller profit. Buyers get higher quality, but would prefer a lower price. Price floors encourage sellers to waste resources:  higher quality than buyers are willing to pay for  
    29. 29.   The price floor and ceiling are being necessary to control prices of essentials otherwise not affordable for middle and lower class. It is also effecting to petroleum and agriculture industry badly because they produce essential and government cannot afford high rates of these products.

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