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Week 6: Price Controls - Coggle Diagram
Week 6: Price Controls
Price Control
Prices move towards equilibrium in free markets
The market will eventually clear
Government mandated maximum prices (price ceiling) or minimum (price floor)
Often imposed during war
Price Ceillings
Legally enforced maximum prices for goods and services
Non binding price ceiling
ineffective price ceiling because it is set too high (the current equilibrium price is significantly lower)
For it to be binding it needs to be set below the equilibrium price
Binding price ceiling lead to
Quantity demanded will rise as price drops
Quantity supplied will decrease because of suppliers unwillingness to produce for lower prices
This will create a shortage
Consumers that wouldn't be able to buy at market will need to go to the blackmarket and pay steeper prices than the equilibrium prices
Overtime the shortage will get bigger as suppliers are more incentivised to sell in black markets or move to another market. Demand would also keep on creating more consumers because of low price
Both curves become more elastic in the long run
opportunity costs rises
Seek to help consumers
Important thing to note during exam is what are they supposed to do vs what they actually do
Unintended consequences
Creation of black markets
Size or quality for products is reduced
Price ceilings real world examples
Price Gouging
Laws
Temporary price ceilings
Usually after natural disasters
Consequences
Restreicted prices can't ration effectively
Severe shortages
Pricing during disaster
Effects
Prices rise so supply rises in order to meet the increased demand.
We know that the price should rise, the question is, by how much?
Price Floors
Examples are minimum wage, agricultural subsidies
Same unintended consequences as price ceilings
They can also de binding or non binding
Looks to take care of suppliers
Binding price floors lead to:
Price rises
Massive increase in quantity supplied
Massive decrease in quantity demanded
Massive surplus is created
Suppliers only win if government willingly buys the surplus . If the government doesn't, then black market is created.
Black market is created with surplus under the equilibrium price
Demand and supply curve becomes more elastic over time
Suppliers will sacrifice the production of other goods in order to create the good with the price floor
Price floors only work if government buys surplus or gives it as humanitarian aid
Long lasting effects include major inefficiencies but also disruptions in other markets
Minimum Wage
Lowest hourly rate that firms may legally pay their workers
Reasons behind a minimum wage:
Provide a living wage
Help working poor people who are often unskilled
Uninetended consequences
Unemployment cause by:
Decrease in quantity demanded for labor
Increase in quantity supplied for labour
Firms replace low - skilled jobs with capital if possible
Shortening hours for workers
Firms relocate to countries with lower minimum wage