How price controls reallocate surplus.
Market quotas are a form of price floors.
Suppose the market price of corn is 5 a bushel but the government sets a price of 7.
Price supports sets a minimum price just like as before but here the government buys up any excess supply.
Price controls and quotas.
1 price ceiling 2 price floor.
A price ceiling is the legal maximum price for a good or service while a price floor is the legal minimum price.
Price and quantity controls.
Price ceilings which prevent prices from exceeding a certain maximum cause shortages.
A the price floor will not affect the market price or output b quantity supplied will increase c there will be a shortage of apples d quantity demanded will decrease.
Notice that if the price floor were for whatever reason set below the equilibrium price it would be irrelevant to the determination of the price in the market since nothing would prohibit the price from rising to equilibrium.
This is even more inefficient and costly for the government and society as a whole than the government directly subsidizing the affected firms.
Minimum wage and price floors.
Price floor is a situation when the price charged is more than or less than the equilibrium price determined by market forces of demand and supply.
If the government imposes a price floor in the market at a price of 0 40 per pound.
By observation it has been found that lower price floors are ineffective.
The market for apples is in equilibrium at a price of 0 50 per pound.
They can set a simple price floor use a price support or set production quotas.
Depends on govt.
Market interventions and deadweight loss.
Perhaps the best known example of a price floor is the minimum wage which is based on the normative view that someone working full time ought to be able to afford a basic standard of living.
Price floor has been found to be of great importance in the labour wage market.
The effect of government interventions on surplus.
Price floors which prohibit prices below a certain minimum cause surpluses at least for a time.
Suppose that the supply and demand for wheat flour are balanced at the current price and that the government then fixes a lower maximum price.
With a price floor the government forbids a price below the minimum.
A price floor is the lowest legal price that can be paid in markets for goods and services labor or financial capital.
A the government must purchase the surplus to maintain the price b farmers will reduce planting until the market price is 7 c there is a shortage of corn d the private demand will increase over time until 7 is the market price.
Price ceiling pc a maximum price sellers are allowed to charge for a good or service.
When govt intervenes to regulate prices.
Price ceilings and price floors.
