1) In some markets the government has interfered with the rationing function of
ID: 1132901 • Letter: 1
Question
1) In some markets the government has interfered with the rationing function of the market by establishing price ceiling and price floors. Has the establishment of price ceiling and price floors achieved the desired outcomes. Give examples.
W4
2) What are the major determinants of price elasticity of demand? Use those determinants and your own reasoning in judging whether demand for each of the following products is probably elastic or inelastic: (a) bottled water; (b) toothpaste; (c) Crest toothpaste; (d) ketchup; (e) diamond bracelets; (f) Microsoft’s Windows operating system. Why is it important for a producer to know the elasticity of the demand curve he or she faces?
Explanation / Answer
1) price ceiling is effective if it is set at a level below equilibrium price. This means producers recieve lower price and consumers pay lower price. This further implies that quantity demanded is greater than quantity supplied creating shortage. For example in the market of rent, price ceiling is set below equilibrium rent. This creates shortage of houses because of which some consumers are able to rent a house at lower price but there are some people who were earlier able to rent now do not get a house due to shortage created. Government intention of helping people will rather harm them.
Price floor is effective when it is set above equilibrium price. It is implemented to help producers. For example an effective price floor is set in agriculture. This leads to increase in quantity supplied and decrease in quantity demanded. This creates surplus. It benefits some of the farmers who are able to sell but also harms some of the farmers who are not able to sell due to surplus created.
Thus price floor and price ceiling do not always result in desired outcomes.
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