Unit 3 Demand Supply and Consumer Choice Copyright

Unit 3: Demand, Supply, and Consumer Choice Copyright ACDC Leadership 2015 1

Price Controls Who likes the idea of having a price ceiling on gas so prices will never go over $2 per gallon? 2

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Price Ceiling Maximum legal price a seller can charge for a product. Goal: Make affordable by keeping price from reaching Eq. Price Gasoline S $8 Does this To be “binding”, 6 policy help consumers? a price ceiling must 4 Result: BLACKbe below equilibrium Price MARKETS 2 Ceiling Shortage 1 (Qd>Qs) D Copyright ACDC Leadership 2015 10 20 30 40 50 60 70 80 Q 4

Price Floor Minimum legal price a seller can sell a product. Goal: Keep price high by keeping price from falling to Eq. P Corn S $ Surplus (Qd<Qs) To have an effect, Price Floor a price floor must be Does this above equilibrium 4 3 policy help corn producers? Copyright ACDC Leadership 2015 2 1 D 10 20 30 40 50 60 70 80 Q 5

Practice Questions 1. Which of the following will occur if a legal price floor is placed on a good below its free market equilibrium? A. Surpluses will develop B. Shortages will develop C. Underground markets will develop D. The equilibrium price and quantity will remain the same E. The quantity sold will increase 2. Which of the following statements about price control is true? A. A price ceiling causes a shortage if the ceiling price is above the equilibrium price B. A price floor causes a surplus if the price floor is below the equilibrium price C. Price ceilings and price floors result in a misallocation of resources 6 D. Price floors above equilibrium cause a shortage Copyright ACDC Leadership 2015

Price Controls and Efficiency 7

Are Price Controls Good or Bad? To be “efficient” a market must maximize consumers and producers surplus P S CS Pc PS D Copyright ACDC Leadership 2015 Qe 8

Are Price Controls Good or Bad? To be “efficient” a market must maximize consumers and producers surplus P S Pc Price CEILING DEAD WEIGHT LOSS The Lost CS and PS. CS INEFFICIENT! PS D Copyright ACDC Leadership 2015 Qceiling Qe 9

Are Price Controls Good or Bad? To be “efficient” a market must maximize consumers and producers surplus P S CS Pc PS D Copyright ACDC Leadership 2015 Qe 10

Are Price Controls Good or Bad? To be “efficient” a market must maximize consumers and producers surplus P S Price FLOOR Pc CS DEAD WEIGHT LOSS INEFFICIENT! PS Not Maximizing CS and PS D Copyright ACDC Leadership 2015 Qfloor Qe 11

2010 Question 3 Copyright ACDC Leadership 2015

2010 Question 4 Copyright ACDC Leadership 2015

2012 Question 17 Copyright ACDC Leadership 2015