ECON101 Lecture Notes - Lecture 9: Price Ceiling, Economic Equilibrium, Avoidance Speech
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15 Oct 2015
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Price ceiling (price cap): illegal to charge a price higher than a specified level. The price ceiling is set below equilibrium price: ex. If equilibrium price is , and the government sets a ceiling at ; this means it is illegal for the price to be higher than . If price cap is set above equilibrium price, it has no effect o. We end up with the equilibrium price o o. Rent ceiling: government sets a maximum price that landlords can charge. 3 outcomes if the rent ceiling set below equilibrium price: housing shortage quantity demanded for housing > quantity supplied for housing. Black market: illegal market that operates alongside a legal market in which a price ceiling or other restriction has been imposed. 2 key ideas about fairness: fair-rules view: exchange should be voluntary. In the housing market, individuals are willing to pay , but the government says it"s illegal. Fair result view: fair if the outcome is fair.
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Related Questions
Consider the market for rental housing in Your town. The demand and supply schedules for rental housing are given in the table.
Price ($ per month) |
Quantity Demanded (thousands of units) |
Quantity Supplied (thousands of units) |
1100 |
40 |
80 |
1000 |
50 |
77 |
900 |
60 |
73 |
800 |
70 |
70 |
700 |
80 |
67 |
600 |
90 |
65 |
500 |
100 |
60 |
- In a Free market for rental housing, what is the equilibrium price and quantity?
- Now suppose the government in Your town decides to impose a ceiling on the monthly rental price. What is the highest level at which such a ceiling could be set in order to have any effect on the marker? Explain your answer.
- Suppose the maximum rental price is set equal to $500 per month. Describe the effect on quantity demanded, supplied, and exchanged in the rental-housing market.
- Suppose a black market develops in the presence of the rent controls in part (c). What is the black market price that would exist if all of the quantity supplied were sold on the black market?