SUPPLY, DEMAND

& GOVERNMENT
POLICIES
Reported by: Cora Ignacio

Objectives:
Differentiate the impact of Price Ceiling
and Price Floor.

Objectives:
Differentiate the impact of Price Ceiling
and Price Floor.
Analyze the effects of Price Control.

Objectives:
Differentiate the impact of Price Ceiling
and Price Floor.
Analyze the effects of Price Control.
Interpret graphs to illustrate
importants of opportunity cost.

Demand

means the amount of a particular

economic good or service that a
consumer or group of consumers will
want to purchase at a given price.

Demand

means the amount of a particular

economic good or service that a
consumer or group of consumers will
want to purchase at a given price.

Supply

refers to the amount of a product that

producers and firms are willing to sell
at a given price when all other factors
being held constant.

Goverment Policies
is a policies imposed by the government
applied to goods and services to protect
the sellers and consumers rights.

Price Ceiling
is a legally determined maximum price
above which market price is not
allowed to rise.

Price Ceiling
is a legally determined maximum price
above which market price is not
allowed to rise.
Some examples include rent control,
the price ceiling on natural gas in the
early 1960s, the maximum price on
gasoline, and the maximum price on
pharmaceutical drugs.

Price Floor
is a legally determined minimum price
that sellers may receive for a product.

Some examples include agricultural

price supports, dairy price supports
and minimum wage regulations.

Price Control
are governmental restrictions on the
prices that can be charged for goods and
services in a market.
Some examples of price controls imposed by
the government include rent control, agricultural
price supports, and minimum wage regulations.

Objective 1
Use demand and supply graphs to
analyze the economic impact of a
price ceiling.

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Objective 2: .. the economic impact of a price

ceiling.
Example 2: Consider the market for rental apartments.
In the absence of any government intervention, the
equilibrium rent is $800.

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Objective 2: .. the economic impact of a price

ceiling.
Example
2: Consider the market for rental apartments.
In the absence of any government intervention, the
equilibrium rent is $800. Suppose the government
imposes a rent ceiling at $600.

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Objective 2: .. the economic impact of a price ceiling.

No government
intervention

With price
ceiling

Market price

$800

$600

Quantity Demanded

300,000

350,000

Quantity Supplied

300,000

250,000

Quantity Traded

250000

250,000

Shortage

100,000

Consumer Surplus

T+U+X

T+U+V

Gain: V-X

Producer Surplus

V+W+Y

Loss: V+Y

Economic Surplus

T+U+X+V+W+Y

T+U+V+W

Loss: X+Y

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Objective 2: .. the economic impact of a price

ceiling.

Without rent control, 50,000 more apartments would be rented.

By not renting these 50,000 apartments, a deadweight loss
equal to (X+Y) is created.
For the last unit traded, marginal benefit is greater than marginal cost.

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Objective 2: .. the economic impact of a

price ceiling.

The rent control creates a persistent shortage of 50,000

apartments.
Are there beneficiaries?
beneficiaries Yes, those who are able to rent
apartments now pay $600 instead of $800.
Some producer surplus (the area V) has been transferred
to consumers.

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Objective 3
Use demand and supply graphs to
analyze the economic impact of a
price floor.

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Objective 3
Use demand and supply graphs to
analyze the economic impact of a
price floor.

A price floor is a legally determined minimum price that

sellers may receive for a product. The market price
cannot fall below this price.

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Objective 3
Use demand and supply graphs to
analyze the economic impact of a
price floor.
A price floor is a legally determined minimum price that
sellers may receive for a product. The market price
cannot fall below this price.
Some examples include agricultural price supports,
dairy price supports, and minimum wage regulations.

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Objective 3
Use demand and supply graphs to
analyze the economic impact of a
price floor.
A price floor is a legally determined minimum price that
sellers may receive for a product.
Some examples include agricultural price supports,
dairy price supports and minimum wage regulations.

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Objective 3: .. the economic impact of a price

floor.
Example 3: Consider the milk market. In the absence of
any government intervention, the equilibrium price is $2.00.

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Objective 3: .. the economic impact of a price

floor.
Example 3: Consider the milk market. In the absence of
any government intervention, the equilibrium price is $2.00.
Now the government imposes a price floor at $ 2.50 to help
dairy farmers.

The price floor creates a

persistent surplus:
Qs = 650,000, Qd = 300,000
Surplus = Q4 Qd
= 350,000 gallons.

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Objective 3: .. the economic impact of a price

floor.
No government
intervention

With price
floor

Market price

$2.00

$2.50

Quantity Demanded

500,000 gallons

300,000 gallons

Quantity Supplied

500,000 gallons

650,000 gallons

Quantity Traded

500,000 gallons

300,000 gallons

Surplus

350,000 gallons

Consumer Surplus

A+B+D

Loss: B+D

Producer Surplus

C+E

B+C

Gain: B E

Economic Surplus

A+B+C+D+E

A+B+C

Loss: D+E

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Objective 3: .. the economic impact of a price

floor.
Without a price floor, 200,000 more gallons of milk would
be consumed. By not selling these 200,000 gallons, a
deadweight loss equal to (D+E) is created.
For the last unit purchased, marginal benefit exceeds marginal cost.

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Key
Points

Price ceilings and price floors:

reduce the economic surplus.

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Key
Points

Price ceilings and price floors:

reduce the economic surplus.
create a deadweight loss.

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Key
Points

Price ceilings and price floors:

reduce the economic surplus.
create a deadweight loss.
redistribute some surplus from producers to
consumers in the case of a price ceiling.

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Key
Points
Price ceilings and price floors:
reduce the economic surplus.
create a deadweight loss.
redistribute some surplus from producers to
consumers in the case of a price ceiling.
redistribute some surplus from consumers to
producers to in the case of a price floor.

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Key
Points
Price ceilings and price floors:
reduce the economic surplus.
create a deadweight loss.
redistributes some surplus from producers to
consumers in the case of a price ceiling.
redistributes some surplus from consumers to
producers to in the case of a price floor.
reduce the quantity traded.

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Price ceilings and price floors:

alter the value of resources and lead to a
misallocation of resources.

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Price ceilings and price floors:

alter the value of resources and lead to a
misallocation of resources.
create a market outcome that is inefficient.

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Price ceilings and price floors:

alter the value of resources and lead to a
misallocation of resources.
create a market outcome that is inefficient.

While price ceilings and price floors reduce

economic efficiency,
efficiency often they are justified on
equity grounds. For example, consider the
arguments in favor of rent control and minimum
wage regulations.

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Government Intervention in the Market

Buyers look to government for ways to
hold prices down.
Sellers look to government for ways to
hold prices up.

Rent Controls
is a price ceiling on rents set by
government.
An example is rent control in Paris
following World War I and World War II.

Excise Taxes
An excise tax is a tax that is levied on a
specific good.
A tariff is an excise tax on an imported
good.
Taxes and tariffs raise prices and reduce
quantity.

SUMMARY
A price ceiling is a legal maximum on the price of a good.
An example is rent control. If the price ceiling is below
the equilibrium price, it is binding and causes a shortage.
A price floor is a legal minimum on the price of a good.
An example is the minimum wage. If the price floor is
above the equilibrium price, it is binding and causes a
surplus. The labor surplus caused by the minimum
wage is unemployment. A price floor is a legal minimum
on the price of a good. An example is the minimum
wage. If the price floor is above the equilibrium price, it
is binding and causes a surplus. The labor surplus
caused by the minimum wage is unemployment.

SUMMARY
A tax on a good places a wedge between the
price buyers pay and the price sellers receive,
and causes the equilibrium quantity to fall,
whether the tax is imposed on buyers or sellers.
The incidence of a tax is the division of the
burden of the tax between buyers and sellers,
and does not depend on whether the tax is
imposed on buyers or sellers.
The incidence of the tax depends on the price
elasticities of supply and demand.

CONCLUSION: Government Policies

and the Allocation of Resources
Each of the policies in this chapter affects
the allocation of societys resources.
It is important for policy makers to apply
such policies very carefully.

Thank you...