ch 4 Macroeconomics: Price Ceilings, floors, binding, and non binding
Binding price floor:
Price floor is set above the equilibrium price, preventing the market from reaching the equilibrium. a floor is the lowest price that can be set,
If minimum wage is above equilibrium
- Unemployment - Higher income for workers who have jobs - Lower income for workers who cannot find jobs
Assume the equilibrium price in the market for socks is $1 per pair. 1. The government decides socks are too expensive and states, "the maximum price for a pair of socks is $0.75." This would be a 2.The government decides socks are too expensive and states, "the maximum price for a pair of socks is $2.75." This would be a 3. The government decides socks are too cheap and states, "the minimum price for a pair of socks is $0.85." This would be a Binding price floor 4. The government decides socks are too cheap and states, "the minimum price for a pair of socks is $2.55." This would be a Non-Binding price floor 5. If a market is not producing at the optimal quantity such that the total surplus (consumer surplus + producer surplus) is maximized, then the market has ______ 6. In markets, the ______ serves as a transmitter of information and a rationing device.
1) BINDING PRICE CEILING the maximum price is below the equilibrium price this is an example of a price ceiling that is binding. In case of a price ceiling, we set a max price beyond which we cannot sell. 2. NON-BINDING PRICE CEILING As price ceiling tells us the maximum price beyond which goods cannot be sold and this maximum price is not binding the equilibrium price of $1 hence it will be 3. NON-BINDING PRICE FLOOR a price floor minimum price that producers should receive. market holding a price of $1 which is higher than that of $0.85. the price floor will not be binding. 4. BINDING PRICE FLOOR the government is demanding a price that is higher than the market price to help the producers. As minimum price means price floor. 5. DEADWEIGHT LOSS If the market is not producing at optimal quantity such that total surplus ( consumer surplus + producer surplus) is maximized. It is because the market is probably producing a lower quantity due to monopoly power or maybe due to some government intervention 6. PRICE serves as a transmitter of information and rationing device. buyers and sellers have perfect knowledge regarding the price in a perfectly competitive market
In a price ceiling, a binding constraint causes what ?
A shortage. Sellers must ration the scarce goods. Less supply, more demand If rent is our example of price ceiling, there is a binding constraint, the price goes down which means more people can afford the rent and that will cause demand to go up.
Use the image above. At a wage of $7, there will be a __________ of unskilled workers equal to __________ thousand workers.
At a wage of $7, there will be a SURPLUS of unskilled workers equal to 20 thousand workers. The equilibrium in the market was set at $6 wherein the supply and demand of unskilled labour was equal which is 30. By increasing the wage rate to $7 we have disturbed the equilibrium which in turn affects the quantity of labour supplied and quantity of labour demanded in the market. From the figure we can easily notice that at $7 Quantity of unskilled worker demanded (i.e. QD) get reduced to 20,000 which at $6 was 30000 Also, Quantity of unskilled worker supplied (i.e. QS) get increased to 40000 from 30000 At a wage higher than the equilibrium wage, the quantity supplied (Qs) is greater than the quantity demanded (Qd) which is defined as a surplus. The magnitude of the surplus is the difference between Qs - Qd = 40 - 20 = 20.
The market: Playstation 5 The equilibrium price: $1000 per unit Assume the government sets a policy that states, "The Playstation 5 price CAN NOT FALL BELOW $1200 per unit." This policy would be an example of:
Binding Price Floor
The market: Playstation 5 The equilibrium price: $1000 per unit Assume the government sets a policy that states, "The Playstation 5 price CAN NOT RISE ABOVE $800 per unit." This policy would be an example of:
Binding Price Floor
Consumer and producer surplus are measured in units of:
Dollars The definition of both consumer and producer surplus is the difference between the willingness to pay (or accept) and the price actually paid (or accepted). The price is in units of dollars as well as the willingness to pay (and accepted).
In order for a price floor to have an impact on a market it must be set below the equilibrium price.
False. For a price floor to be binding, it must be set above the equilibrium price in the market.
True or False: The minimum wage is a great example of a price ceiling in the labor market.
False. The minimum wage is a price floor since it sets the lowest price that is legally allowed in the market for labor. The price ceiling is the maximum price that a seller of either goods or services should charge for the goods or services sold.
A Price Floor is a minimum price that buyers are expected to pay for a product.. A floor has to be above equilibrium. A floor is going to lead to a surplus
Price floor
What can happen as a result of a binding constraint in a price ceiling of rent?
Landlords don't take good care of property, under the table money, buyer discrimination
Example of Price Floor?
Minimum Wage Laws
The market: Playstation 5 The equilibrium price: $1000 per unit Assume the government sets a policy that states, "The Playstation 5 price CAN NOT FALL BELOW $1300 per unit." This policy would be an example of:
Non-Binding Price Ceiling
Which of the following rationing devices give producers an incentive to produce? Mark all that apply
Price
.A Price Ceiling is the cap on a price that the government sets so the price cannot go up to equilibrium. the maximum price a seller is allowed to charge. A ceiling has to go below equilibrium if it's going to have an effect on the market. a ceiling is going to lead to a shortage.
Price Ceiling
How do prices transmit information (choose the best answer below)?
Prices can indicate scarcity and give incentives for producers to change production and for consumers to change consumption based on scarcity in society
Use the graph above. Suppose that wheat producers lobby the government for a price floor and receive one. This price floor is set at PF. Assuming that P1 was the original price prior to the price floor, what has happened to the producers' surplus as a result of the imposition of the price floor?
Producers' surplus has decreased by "area 5" under "P1" and increased by "area 2," resulting in a new area of "area 2+3" The producer surplus prior to the regulation is area (3+5). After the binding price floor is set, producers receive a higher price (at Pf) but consumers respond to that higher price by purchasing less (Q1 now instead of Q2). Therefore, the new producer surplus is area (2+3).
Example of price ceiling?
Rent Control Laws
Which of the following is an example of a non-binding price floor? (Hint: a non-binding price floor means the regulation does not actually interfere with the market!)
The minimum price for corn is set to $1.00, while the market price is $1.50. the price floor is the minimum price allowed to charge and it is effective if the price floor is below the market price otherwise the market price will be the same after the price floor. There are two components to this question: 1. identifying a price ceiling or price floor, and 2. identifying if the regulation is binding or non-binding. 1. Price ceilings are the maximum price that is legally allowed in a market, while price floors are the minimum price legally allowed in a market. Since we are asked to identify a floor, we are looking for language such as "minimum price" or "cannot fall below." 2. A binding regulation means that the equilibrium price cannot be reached because of the regulation while a non-binding regulation means that the equilibrium price still can be reached. In this example, if prices cannot fall below $1 yet the equilibrium price is $1.50, the regulation still allows us to reach $1.50 since that price is above the $1.
in a Price Ceiling, binding constraint means
The price ceiling is set below the equilibrium price. the price tries to go up and it hits the ceiling so it can't go any further anything below the ceiling is allowed nothing above the ceiling is allowed this is a binding price ceiling
True or False: If a price floor or price ceiling is non-binding, then the price floor or ceiling does not cause deadweight loss in the market.
True
The market: Sugar The equilibrium price: $2 per pound Assume the government sets a policy that states, "Sugar CAN NOT BE SOLD FOR MORE than $1 per pound." This policy would be an example of:
binding price ceiling
Non-binding price floor:
a price floor is set below the equilibrium price, still allowing the market to reach equilibrium price and quantity.
Which of the following would not result from a price ceiling (set below the equilibrium price)?
an increase in supply Price controls (ceilings and floors) change price, which will not shift the supply or demand curves. These changes in price only result in movement along the supply and demand curves (changes in Qd and Qs).
Use the graph above. Suppose that wheat producers lobby the government for a price floor and receive one. This price floor is set at PF. What area corresponds to the consumer surplus after the imposition of this price floor?
area 1 The price floor at Pf is binding, which reduces consumer surplus to just area 1. The original consumer surplus was areas 1+2+4.producer surplus was 3+5. When price floor imposed, consumer surplus is area 1+2 and producer surplus is 3. And 4+5 is deadweight loss because of price floor.
Use the graph above. Suppose that wheat producers lobby the government for a price floor and receive one. This price floor is set at PF. What area corresponds to deadweight loss after the imposition of this price floor?
areas 4 + 5 Prior to the price floor, the total surplus in the market is areas 1+2+3+4+5, which is the maximum total surplus that can be achieved in the market. This is achieved at the price P1 and quantity Q2. After the price floor is implemented, the price increases to Pf and the quantity reduces to Q1. The new total surplus is areas 1+2+3. Therefore the loss in total surplus resulting in the regulation is areas 4+5.
The market: Sugar The equilibrium price: $2 per pound Assume the government sets a policy that states, "Sugar CANNOT BE SOLD FOR LESS than $3 per pound." This policy would be an example of:
binding price floor
The market: Sugar The equilibrium price: $2 per pound Assume the government sets a policy that states, "Sugar CAN NOT BE SOLD FOR MORE than $4 per pound." This policy would be an example of:
non-binding price ceiling
The market: Playstation 5 The equilibrium price: $1000 per unit Assume the government sets a policy that states, "The Playstation 5 price CAN NOT FALL BELOW $800 per unit." This policy would be an example of:
non-binding price floor
Use the graph above to answer the following question. Now assume the government states, "the minimum price for grapes in the market is $3." The deadweight loss in this market is equal to (select the letters that correspond to the areas in the graph above. If you think no deadweight loss exists, select the answer "no deadweight loss exists").
e, f
Use the graph above to answer the following question. Now assume the government states, "the minimum price for grapes in the market is $1." What will be the quantity bought and sold in this market after the government makes this regulation?
incorrect 120
in a price ceiling, not binding means
it is set above the equilibrium price and there is no effect on the price or quantity sold
In a price floor, non binding constraint means
it is set above the equilibrium price. this causes a surplus
In a price floor, binding means
it is set below the equilibrium price, there is no effect on the market
Use the graph above. Suppose the minimum wage is set at $5. The result will be:
no impact on the unskilled labor market The minimum wage is a price floor. At a minimum wage of $5, the equilibrium wage is above at $6, which is still an attainable value in this market. Therefore the price floor is non-binding as does not impact the market at all.
The market: Roses The equilibrium price: $18 per dozen Assume the government sets a policy that states, "Roses cannot be sold for less than $12 per dozen." This policy would be an example of:
non-binding price floor
The market: Sugar The equilibrium price: $2 per pound Assume the government sets a policy that states, "Sugar CAN NOT BE SOLD FOR LESS than $1 per pound." This policy would be an example of:
non-binding price floor
Use the graph above to answer the following question. Now assume the government states, "the minimum price for grapes in the market is $3." This type of regulation is called a _________and the amount bought and sold in this market after this regulation is put in place is ______
partial incorrect: binding price floor, 110
If a binding price ceiling is set in a market, there will be a(n) ______in the market that ________deadweight loss.
persistent surplus, causes
In housing markets, governments often have policies of "rent control" which prevent rent prices from rising above a certain amount. This type of regulation is called:
price ceiling
In labor markets, federal, state and local ordinances require that employers pay at least a base minimum wage to employees. This type of regulation is called:
price floor
Prices serve at least two main economic functions in markets. Select the two functions that prices serve below:
rationing device, transmitter of information
"Rationing devices" are best described as (choose the best answer):
things that help to allocate production and distribution of economic activity. Good rationing devices in markets are devices that give incentives to producers to produce while allocating production to their highest valued use. Examples of rationing devices are: prices, brute force, first-come-first-served.