CAS EC 101 Chapter Notes - Chapter 6: Earned Income Tax Credit, Ice Cream, Price Ceiling

• School: Boston University
• Department: Economics
• Course: CAS EC 101
• Professor: Todd Idson

Document Summary

Buyers want lower price while sellers want higher price. Price ceiling: legislated maximum price, price can"t rise above this level. Price floor: legislated maximum, price can"t fall below this level. Ice cream eaters imposes price ceiling on market for ice cream. Price that balances supply and demand () is below ceiling. Market forces naturally move economy to equilibrium. Gov"t imposes price ceiling , equilibrium price of is above, the ceiling is a binding constraint. When the government imposes a binding price ceiling on a competitive market, a shortage fo the good arises, and sellers must ration the scarce goods among the large number of potential buyers. Rationing mechanism in a free competitive market is efficient and impersonal. Ice cream makers feel equilibrium price is too low. If gov"t imposes , equilibrium price is above floor, price floor is not binding. Market forces naturally move economy to equilibrium, price floor has no effect.