Demand and Supply, price ceiling, price floor

What kind of price restriction is a maximum price that can be legally charged, and where is it imposed in comparison to the equilibrium price?

A government imposed maximum price is a price ceiling. It is designed to stop the price from going above a certain level. For it to have any significance, it must be imposed below the equilibrium price.

Which kind of a price restriction causes quantity demanded to be larger than quantity supplied?

A price ceiling causes the quantity demanded to be larger than the quantity supplied and causes a shortage.

Which kind of price restriction is designed to help the sellers in a market - a price ceiling or a price floor?

A price floor causes the legal selling price to be above the equilibrium price and is designed to help the sellers in a market.

Based on your answer in #12, would there be under- or over- investment in the industry?

A price floor results in overinvestment in the industry. The higher price forced by the government makes it attractive for more firms to enter the industry and for existing firms within an industry to expand.

At prices above the equilibrium price, how does quantity demanded compare to quantity supplied?

Above the equilibrium price, the quantity demanded is smaller than quantity supplied. This defines a surplus.

Assume there is an increase in the number of firms, an improvement in productivity, a decrease in the cost of an input, an expectation by consumers of a lower price, a decrease in income, and a decrease in taxes. Which way would the demand and supply curves move?

All of the influences cause the supply curve to shift right, except the expectation by consumers of a lower price and a decrease in income. These cause the demand curve to shift left.

Assume there is an improvement in productivity, an increase in the number of firms in an industry, and a decrease in the cost of an input. Is there any uncertainty on equilibrium price or equilibrium quantity?

All of these influences impact the supply curve, and all of them would cause the curve to shift to the right. Since there is only one curve moving and there is no inconsistency in the influences, then there is no uncertainty. Summary: E*p decreases; E*q increases

At prices below the equilibrium price, how does quantity demanded compare to quantity supplied?

Below the equilibrium price, the quantity demanded is larger than the quantity supplied. This defines a shortage.

Assume there are three influences indicating a rightward shift of the demand curve and one influence indicating a leftward shift of the demand curve. What do you do in this case?

In cases with inconsistencies on the demand or supply side, nothing can be done. There is no way of knowing if one effect will dominate the other or if they will cancel out. This means we are unable to use the demand/supply model to make any predictions.

Assume there is a decrease in the number of consumers, a decrease in productivity, an increase in the cost of an input, and an expectation by firms of a higher price. How would you summarize the effect on the equilibrium price and quantity?

In this case, the first influence would cause the demand curve to shift left. All of the other influences would cause the supply curve to shift left. With both curves shifting left, E*q decreases, but E*p = ? (equilibrium quantity decreases, but any effect on equilibrium price is uncertain). Note that we are unable to state the supply curve will shift more. Just because there are three influences on supply and only one on demand does not necessarily mean the supply curve will shift by a larger amount.

In a certain analysis it is determined there are seven influences on demand and only one influence on supply. Can we conclude with certainty that the demand curve will move more than the supply curve?

Influences on supply and demand are not additive. So, we would not be able to state with certainty that the demand curve would shift by a larger amount than the supply curve.

Based on your answer to the previous question, would you expect a surplus or shortage?

Price floors cause persistent surpluses - the quantity supplied at the price floor is larger than the quantity demanded.

Suppose you are told that as a result of a government price restriction, a black market has developed and the prices on the black market are above the equilibrium price. What kind of a price restriction did the government impose?

The creation of black markets and high black-market prices are some of the outcomes expected from a price ceiling.

What kind of price restriction would prevent a price from going below a certain value?

The described price restriction is a price floor. Notice that the automatic pressure would cause a decrease in price, but this lower price is stopped by the price floor.

Assume there is a decrease in the price of a complement, an expectation of higher income, a decrease in taxes, and consumers expect a lower price. How would you summarize the effect on the equilibrium price and quantity?

The first two influences would shift the demand curve to the right. The third would cause the supply curve to shift right. The last one would cause the demand curve to shift left. Since we have an inconsistency on the demand side (influences indicating right and left shifts), the model is useless, and no predictions can be made.

Assume the government puts a restriction to stop the price from going above a certain value. What is the name of this price restriction?

When the government stops the price from going above a certain value this is called a price ceiling.

Assume the government puts a restriction to stop the price from going below a certain value. What is the name of this price restriction?

When the government stops the price from going below a certain value this is called a price floor.

Based on your answer to the previous question, what change could be predicted with certainty (if any) and what would be uncertain?

When the supply curve shifts right and the demand curve shifts left, the equilibrium price definitely decreases, but any effect on the equilibrium quantity is uncertain.

Based on your answer in #12, would the actual amount bought and sold be larger or smaller than the equilibrium quantity?

With a price floor, the number of units actually bought and sold decreases compared with the equilibrium quantity. The same holds true in the case of a price ceiling.

When there is a surplus, there is an automatic pressure for the price to _______.

decrease