Look at the figure below and answer the following questions: There is a price fl

Question

Look at the figure below and answer the following questions: There is a price floor at P=40. What is the quantity supplied at that price? What is the quantity demanded at that price? Is there a shortage, or a surplus, in the market at that price (floor)? Provide a real-life example of a price floor. Assume now that the market described by the supply and demand curves above is originally in equilibrium at Q=300 and P=30. The government now imposes a price ceiling at $10. What is the quantity supplied at that price? What is the quantity demanded at that price? Is there a shortage, or a surplus, in the market at that price (ceiling)? Provide a real-life example of a price ceiling.

Explanation / Answer

Price floor at $40

1.Quantity supplied 400
2.Quantity demanded 200
3.There is a surplus of 200 quantity supplied
4.Real world examples:
A good example of how price floors can harm the very people who are supposed to be helped by undermining economic cooperation is the minimum wage. Legislating a minimum wage is commonly seen as an effective was of giving raises to low-wage workers. Unfortunately, the effect of the price floor is a surplus. In this case, it is a surplus of workers, which is referred to as unemployment. A wage floor hits workers with limited skills, primarily young people. According to Dwight R. Lee, a Ramsey Professor of Economics and Private Enterprise at the University of Georgia, the minimum wage reduces the cost of discriminating on non-economic grounds in hiring. With more young people applying for jobs than employers want to hire, and with no legal way of paying a lower wage, it costs nothing to exclude some applicants from consideration. If an employer has a choice between hiring the mayor's son or a poor kid from the other side of the tracks who would be willing to work for less, the mayor's son is almost sure to get the job. The poorer kid would have a far better chance if he could communicate his willingness to work by accepting the lower wage that is now outlawed. Lee also notes that the political demand for minimum wage does not come from low-wage workers. It is mainly coming from the labor unions. Unskilled nonunion workers can compete with skilled union workers only by offering their services for less. Increasing the minimum wage limits this competition, allowing union workers to demand higher wages that would otherwise be possible.

Price ceiling at $10
1.Quantity supplied is 100
2.Quantity demanded is 500
3.There is a shortage of 400 quantity supplied
4. There are many examples of price ceilings. A common example is government set rent control. In order to provide more affordable housing the government often sets a price ceiling on rents. The rationale behind this is to ensure for renters there will be affordable housing for those who cannot afford the current market price. A second example of price ceilings is usury laws. Usury laws prohibit the charging of excessive interest on loans. Essentially the law acts like a price ceiling because it sets the legal maximum interest rate that can be charged on loans. A final example of price ceilings is a historical one and it occurred in the 1970’s. The U.S. government set a price ceiling on gasoline to make it more affordable for consumers. Due to the increased demand for gasoline, consumers had to wait in long lines to get gas and often were unable to purchase gasoline due to the shortage that was caused by the price ceiling. Research on this event concluded that the true price of gas, which included both the cash paid and the time spent waiting in line, was often higher than if prices were not controlled at all. In reality it would have been in the government’s (and consumers) best interest to have left gas prices at the market equilibrium instead of the implementing the price ceiling.

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