7. How does the elasticity of supply and demand affect the price ceiling’s affec

Question

7. How does the elasticity of supply and demand affect the price ceiling’s affect on producer and consumer surpluses?


8. If the price ceiling were removed, what would happen to the price of gasoline in the near term? Is it fair that the available gasoline would only go to those people who are willing and able to pay the higher price? In being willing to pay more, does this mean that these people value gas more highly? What ideas of fairness presented in your text do you think apply in this case?


9. Why do you think there has been no suggestion of imposing a price ceiling on gasoline given current events in this market?

Explanation / Answer

7. In this case, supply and demand are both inelastic, meaning consumers need the gasoline, and since there is a shortage, suppliers do not have a lot to supply. This is why the celing had a major affect on both consumer and producer surplus. If the good was elastic, the affect woiuld have been much smaller. 8. In the near term, or short run, the price would rise back up to equilibrium and quantity would also rise back up. It is not fair, that the people with the higher willingness to pay receive the gas, but their demand allows this to happen. This is what ultimately drives the price up. If people said, no, we will not pay that price and waited and did not purchase gas for a week, the price would have no choince but to drop. In our case, the people who are willing to pay higher prices do value the gas more highly than the people who do not wish to pay these prices. One option would be to price discriminate and supply gas at two prices to meet different groups demand. Maybe give a student discount. 9. In the current day and age, there are no price ceilings on gas because we want to prevent social economic loss and inefficiancy. In other words, we do not want to incur a dead wieght loss. This is worse for society than a shortage of gasoline alone. Hope this helps

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