ECO101H1 Lecture Notes - Lecture 6: Price Ceiling, Price Floor, Economic Equilibrium

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4 Oct 2016

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Price controls: the government can set a legal maximum or minimum on the price of goods. Taxes: the government can make buyers and sellers pay a specific amount on each unit. Price ceiling: a legal max on the price of a good or service. Price floor: a legal minimum on the price of a good or services. A price ceiling above the equilibrium price is not binding and has no effect on the market. When price is below the equilibrium there is a binding constraint since it will change the outcome that one will have in a market. At this lower price there will be a shortage made by the price ceiling. A price floor below the equilibrium price is not binding since it has no effect on the market outcome. The price floor above the equilibrium will cause a price floor, the floor is a binding constraint. Minimum laws do not affect highly skilled workers.

Related Questions

1. The language of price controls

Suppose that, in a competitive market without government regulations, the equilibrium price of gasoline is $3.00 per gallon.

Complete the following table by indicating whether each of the statements is an example of a price ceiling or a price floor and whether it is binding or nonbinding.

Statement	Price Control	Binding or Not
Due to new regulations, gas stations that would like to pay better wages in order to hire more workers are prohibited from doing so.	price ceiling/price floor	binding/non
The government has instituted a legal minimum price of $2.70 per gallon for gasoline.price ceiling/price floor
The government prohibits gas stations from selling gasoline for more than $3.40 per gallon.price ceiling/price floor

Suppose that, in a competitive market without government regulations, the equilibrium price of gasoline is $3.00 per gallon.

Complete the following table by indicating whether each of the statements is an example of a price ceiling or a price floor and whether it is binding or nonbinding.

A. The government prohibits gas stations from selling gasoline for more than $2.50 per gallon.

B. The government has instituted a legal minimum price of $3.40 per gallon for gasoline.

C. There are many teenagers who would like to work at gas stations, but they are not hired due to minimum-wage laws.

skymacaw582

A recent study found that the demand and supply schedules for flying disks are as follows:

Price	Quantity Demanded	Quantity Supplied
(Dollars per disk)	(Millions of disks)	(Millions of disks)
11	1	15
10	2	12
9	4	9
8	6	6
7	8	3
6	10	1

Complete the first row of the following table by indicating the equilibrium price and the equilibrium quantity of flying disks in the absence of any price controls.

Scenario	Market Price	Market Quantity	Binding or Not Binding
Scenario	(Dollars per disk)	(Millions of disks)	Binding or Not Binding
No Price Control			N/A
Price Floor
Price Ceiling

Flying disk manufacturers persuade the government that flying disk production improves scientists' understanding of aerodynamics and thus is important for national security. A concerned Congress votes to impose a price floor $2 above the equilibrium price.

Complete the second row of the previous table by indicating the new price and quantity of flying disks when Congress imposes a price floor $2 above the equilibrium price. Then indicate whether the price floor is binding or not binding.

Irate college students march on Washington and demand a reduction in the price of flying disks. An even more concerned Congress votes to repeal the price floor and impose a price ceiling $3 below the former price floor.

Complete the final row of the previous table by indicating the new price and quantity of flying disks when Congress imposes a price ceiling $3 below the former price floor. Then indicate whether the price ceiling is binding or not binding.

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ECO101H1 Lecture Notes - Lecture 6: Price Ceiling, Price Floor, Economic Equilibrium

ECO101H1 Full Course Notes

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