lectures in microeconomics-charles w. upton price ceilings
TRANSCRIPT
Lectures in Microeconomics-Charles W. Upton
Price CeilingsP
Q
Po
Qo
S
DPmax
Qs1 Qd
1
Price Ceilings
The effect of a price ceiling
• An unregulated product sells for Po. Sales are Qo.
P
Q
Po
Qo
S
D
Price Ceilings
The effect of a price ceiling
• An unregulated product sells for Po. Sales are Qo.
• Suppose the government sets a maximum price Pmax
P
Q
Po
Qo
S
DPmax
Price Ceilings
The effect of a price ceiling
• An unregulated product sells for Po. Sales are Qo.
• Suppose the government sets a maximum price Pmax
P
Q
Po
Qo
S
DPmax
Shortage!
Qs1 Qd
1
Price Ceilings
The effect of a price ceiling
• An unregulated product sells for Po. Sales are Qo.
• Suppose the government sets a maximum price Pmax
P
Q
Po
Qo
S
DPmax
Shortage!
Qs1 Qd
1
There is more to the story
Price Ceilings
The effect of a price ceiling
• People try to evade the ceiling
P
Q
Po
Qo
S
DPmax
Price Ceilings
The effect of a price ceiling
• People try to evade the ceiling.
• If suppliers, they shift their supply curve up by $Evade
P
Q
Po
Qo
S
DPmax $Evade, the
cost of evading
Price Ceilings
The effect of a price ceiling
• People try to evade the ceiling.
• If suppliers, they shift their supply curve up by $Evade
P
Q
Po
Qo
S
DPmax
Q1
Price Ceilings
The effect of a price ceiling
• People try to evade the ceiling.
• If suppliers, they shift their supply curve up by $Evade
P
Q
Po
Qo
S
DPmax
Q1
Price goes up
Price Ceilings
The effect of a price ceiling
• People try to evade the ceiling.
• If suppliers, they shift their supply curve up by $Evade
P
Q
Po
Qo
S
DPmax
Q1
No Shortage!
Price Ceilings
The effect of a price ceiling
• How big is this shift?
P
Q
Po
Qo
S
DPmax
Q1
Price Ceilings
The effect of a price ceiling
• How big is this shift?
• If the regulations are a joke, $Evade is small.
P
Q
Po
Qo
S
DPmax
Q1
Price Ceilings
The effect of a price ceiling
• How big is this shift?
• If the regulations are a joke, $Evade is small.
P
Q
Po
Qo
S
DPmax
Q1
Small increase over market price.
Price Ceilings
The effect of a price ceiling
• How big is this shift?
• If the regulations are tough and toughly enforced, $Evade can be quite large
P
Q
Po
Qo
S
DPmax
Q1
Price Ceilings
The effect of a price ceiling
• How big is this shift?
• If the regulations are tough and toughly enforced, $Evade can be quite large
P
Q
Po
Qo
S
DPmax
Q1
Then the regulations have a major impact.
Price Ceilings
The effect of a price ceiling
• How big is this shift?
• If the regulations are tough and toughly enforced, $Evade can be quite large
P
Q
Po
Qo
S
DPmax
Q1
Moral: if you are given the job of enforcing a price
ceiling, don’t work too hard at your job.
Price Ceilings
End
©2004 Charles W. Upton