Chapter 4 Notes

Price ceiling

A price ceiling is a government mandated maximum price above which legal transactions cannot be made.

What is the difference between a price ceiling and a price floor? What effect is the same for both a price ceiling and a price floor?

A price ceiling is effective if it is set below the equilibrium price while, a price floor is effective if it is set above the equilibrium price. Both lead to fewer exchanges than would occur at the equilibrium price.

Price Floor

A price floor is a government mandated minimum price below which legal trades cannot be made.

Price as a rationing device

As a result of scarcity, a rationing device is needed to determine who gets what of the available limited resources and goods. Price serves as a rationing device. It rations goods to buyers who pay the price for the resources. It rations goods to buyers who pay the price for the goods. It is true that dollar price discriminates against the poor, but every rationing device discriminates against someone, and none is clearly superior to dollar price. Also, without dollar price a rationing device there would be no incentive for anyone to produce the good.

Buyers and Higher and Lower Prices

Buyers prefer lower prices to higher prices, ceteris paribus, but they don't necessarily prefer price ceiling to equilibrium prices.

Buyers always prefer lower prices to higher prices. Do you agree or disagree with this statement?

Disagree. Buyers always prefer lower prices to higher prices, ceteris paribus. However, they may be willing to pay higher prices to avoid the effects of a price ceiling.

Key Idea

Economists often distinguish the absolute, or money, price of a good from the relative price of a good.

Should grades in an economics class be "rationed" according to dollar price instead of how well students do in exams?

Grades should not be rationed according to dollar price because if they were, a college degree would no longer demonstrate student performance, but instead demonstrate a willingness and ability to pay for a degree.

Explain how the price of a good can rise at the same time becomes relatively cheaper

If the price of other goods rise faster than the price of the good in question rises, then the good becomes relatively cheaper even though its absolute price is rising.

What must the supply curve look like before a price ceiling does not affect quantity supplied?

If the supply curve is vertical, then a price ceiling does not affect quantity supplied.