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Week 4.2 slides

The document discusses price controls, specifically price ceilings and price floors, and their effects on consumer and producer surplus. It outlines the conditions under which these controls are binding or nonbinding and highlights their potential unintended consequences on economic activity, such as shortages or black markets. The conclusion emphasizes that price controls can distort market signals and lead to inefficiencies.

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Khoa Dang
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11 views

Week 4.2 slides

The document discusses price controls, specifically price ceilings and price floors, and their effects on consumer and producer surplus. It outlines the conditions under which these controls are binding or nonbinding and highlights their potential unintended consequences on economic activity, such as shortages or black markets. The conclusion emphasizes that price controls can distort market signals and lead to inefficiencies.

Uploaded by

Khoa Dang
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 17

RMIT Classification: Trusted

Chapter 6
Price Controls

Copyright © 2021 by W. W. Norton & Company, Inc.​


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RMIT Classification: Trusted

Price Controls

• Consumer surplus is the difference between what a consumer is


willing to pay and the price paid.

• Producer surplus is the difference between the minimum price a


producer is willing to accept and the price received.

• An outcome is efficient when an allocation of resources maximizes


total surplus.

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RMIT Classification: Trusted

Previously—2

• Taxing specific goods leads to a deadweight loss, which reflects


reduced economic activity.

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RMIT Classification: Trusted

Big Questions

1. When do price ceilings matter?

2. What effects do price ceilings have on economic activity?

3. When do price floors matter?

4. What effects do price floors have on economic activity?

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RMIT Classification: Trusted

Price Controls

• Price Ceiling • Price Floor


❖ Legally set maximum price ❖ Legally set minimum price
❖ Rent control apartment, price ❖ Minimum wage
gouging ❖ Three situations:
❖ Three situations: o Nonbinding
o Nonbinding o Binding
o Binding o Long-run effects
o Long-run effects
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RMIT Classification: Trusted

What Are Price Controls?

• Price controls:
❖

• Price ceiling:
❖

• Price floor:

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RMIT Classification: Trusted

How to Remember Price Controls

• Look at the ceiling in the classroom. Is it causing you any


problems?

❖ What happens if the ceiling is only 4 feet high?

• Look at the floor. Can you still get to your desk at the current floor
height?

❖ What if the floor was too high?

❖ You would have to change your behavior to reach your desk.

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RMIT Classification: Trusted

When Do Price Ceilings Matter?

Let’s start with a simple thought experiment:

• The government imposes a price ceiling on bread of $0.50 per loaf.

• What are some unintended consequences?

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RMIT Classification: Trusted

$0.50 Price Ceiling on Bread


Question Explanation In pictures

Will there be more or less


bread for sale ?
Will there be more or less
bread for sale ?
Will the quality change?

Will the opportunity cost of


finding bread change?

Would you buy illegal bread if


you could?

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RMIT Classification: Trusted

The Effects of Price Ceilings

• Three different situations:

❖ A nonbinding price ceiling

❖ A binding price ceiling

❖ Long-run effects of price ceiling

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RMIT Classification: Trusted

1. Nonbinding Price Ceiling

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RMIT Classification: Trusted

2. Binding Price Ceiling

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RMIT Classification: Trusted

3. Price Ceilings in the Long Run

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RMIT Classification: Trusted

Practice What You Know—1

What will be the effect of a nonbinding price ceiling?


A. A surplus will be created.
B. A shortage will be created.
C. There will be no effect.
D. The effect is unknown.

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RMIT Classification: Trusted

Practice What You Know—2

In the event of a binding price ceiling, what is one function that a black
market serves?
A. Reduces the shortage caused by the price ceiling.
B. Decreases the price even further.
C. Creates a monopoly.
D. Causes a surplus of the good.

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RMIT Classification: Trusted

What Effects Do Price Ceilings Have


on Economic Activity?
• Two real-world examples: Rent control and price gouging

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RMIT Classification: Trusted

Conclusion

• Prices act as signals and give information to consumers and


producers.

• Price controls can distort the signals.

• Price controls lead to unintended consequences.

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