ECON 2020 Lecture Notes - Lecture 12: Minimum Wage Law, Price Ceiling, Price Floor

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27 Aug 2018

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Econ2020 lecture 12 chapter 6: supply, demand, and government policies. Government policies that alter the private market economy (ppt slides by ron cronovich: price controls. Price ceiling: a legal maximum on the price of a good or service; you cannot charge this item higher than what you are (ex: rent control) Price floor: a legal minimum on the price of a good or service; you cannot charge this item lower than what you are (ex: minimum wage: taxes. The government"s way to make buyers and sellers pay a specific amount on each unit sold or bought (per unit tax) Example 1: the market for apartments: price ceiling example, use supply and demand curves to show the market, both are steep because they are both in the long-run means inelasticity (apartments are built over periods of time) Means you cannot charge more than surplus of apartments. Means you cannot charge more than shortage of apartments.

Related Questions

The market for health care services can be examined using the tools of supply and demand. In this market, the quantity variable is the hours of health care services. Consumers demand health care services while doctors (or others) supply health care services. We will assume health care services are all of the same quality (so 1 hour of heath care service A is the same as 1 hour of health care service B). The market price is the price per hour of health care services (dollars per hour). Given this, suppose a law mandates that doctors cannot charge a price higher than P_max, where this maximum price is set below the free-market equilibrium price in this market. What will be the effect of this law on the quantity demanded, quantity supplied and the price paid for health care services? Who benefits and who loses from imposing this maximum price that sellers can charge/receive for health care services? (Note: given the price actually paid by consumers for health care must equate supply and demand. This price can include both monetary forms of payment and non-monetary forms of payment; in this example, what forms might such non-monetary payments take? That is if health care must be "rationed" among consumers).

Question 1

During a crisis such as Hurricane Katrina, governments often make it illegal to raise the price of emergency items like flashlights and bottled water. In practice, this means that these items get sold on a first-come, first-served basis. If a person has a flashlight that she values at $5, but its price on the black market is $40, what gains from trade are lost if the government shuts down the black market?

		$30
		$35
		$40
		Indeterminant with the given information.

2 points

Question 2

Which of the following is an example of a price floor?

		A sale price with a limit on the quantity you can purchase.
		Rent-controlled apartments
		Predatory pricing designed to put a competitor out of business.
		The minimum wage

2 points

Question 3

Airline regulation of the 1970s produced a similar result to which of the following government interventions?

		The Affordable Care Act
		Minimum wage laws
		Rent control laws
		Communism

2 points

Question 4

Which of the following is a possible effect of a price ceiling?

		A surplus of the good.
		Increases in product quality.
		Increased gains from trade.
		People will waste time in lines waiting to purchase the good.

2 points

Question 5

What is a price ceiling?

		A minimum price consumers are willing to pay.
		A minimum price allowed by law.
		A maximum price allowed by law.
		A maximum price consumers are willing to pay.

2 points

Question 6

Why are the long lines generated by a shortage worse than paying a higher price in money?

		It is not better or worse. Paying in time and paying in money are essentially the same in a market economy.
		Paying with time reduces the value of money, and prevents valuable trades from occurring.
		Waiting in line is a waste of a valuable resource: time. Paying a price in money transfers the value of resources from one person to another, and maximizes the value of resources.
		Paying with time gives those who do not work an advantage over those who do.

2 points

Question 7

Which of the following is a possible effect of a price floor?

		The quantity supplied exceeds the quantity demanded.
		Increased gains from trade.
		Decreases in product quality.
		A shortage of the good.

You have been hired by a new firm selling electronic dog feeders. Your client has asked you to gather some data on the supply and demand for the feeder, which is given below, and address several questions regarding the supply and demand for these feeders.

Price/Feeder	Quantity Demanded	Quantity Supplied
$300	500	1800
270	600	1700
240	700	1600
210	800	1500
180	1000	1400
150	1100	1300
120	1200	1200
90	1300	1100
60	1400	1000
30	1500	900
10	1600	800

Your client has asked that you develop a report addressing the following questions so that you can present these findings to their Board of Directors:

Questions:

Construct a graph showing supply and demand in the electronic dog feeder market, using Microsoft Excel.
How are the laws of supply and demand illustrated in this graph? Explain your answers.
What is are the equilibrium price and quantity in this market?
Assume that the government imposes a price floor of $180 in the feeder market. What would happen in this market?
Assume that the price floor is removed and a price ceiling is imposed at $90. What would happen in this market?
Now, assume that the price of feeders drops by 50%. How would this change impact the demand for feeders? Explain your answer and reconstruct the graph developed in question one to show this change.
Assume that incomes of the consumers in this market increases. What would happen in this market? Explain your answer and reconstruct the graph developed in question one to show this change.
Assume that the number of sellers decreases in this market. What would happen in this market? Explain your answer and reconstruct the graph developed in question one to show this change.
Explain the difference between a normal good and an inferior good. Would your answers to question 7 change depending on whether this good is normal or inferior? depending on whether this good is normal or inferiorly?

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ECON 2020 Lecture Notes - Lecture 12: Minimum Wage Law, Price Ceiling, Price Floor

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