HUTECH Institute of International Education Supply, Demand and Government policies TOPIC 4 SUPPLY, DEMAND AND GOVERNMENT POLICIES CONTROL ON PRICES 4 1 TAXES 4 2 HUTECH Institute of International Educ[.]
TOPIC SUPPLY, DEMAND AND GOVERNMENT POLICIES 4.1 4.2 CONTROL ON PRICES TAXES HUTECH Institute of International Education Supply, Demand and Government policies 4.1 CONTROL ON PRICES ▪ The interests between buyers and sellers conflict ▪ The control on prices enacted when policymakers believe that the market price is unfair to buyers and sellers ▪ Result in government policies, i.e price ceilings and price floors HUTECH Institute of International Education Control on Prices CONTROL ON PRICES ▪ Price controls ➢ Price ceiling: a legal maximum on the price of a good or service ➢ Price floor: a legal minimum on the price of a good or service Effects on the market outcome? HUTECH Institute of International Education Control on Prices Price Ceiling A price ceiling is the maximum legal price a seller may charge for a product or service shown in the graph below: P S Pe Price Ceiling Pc PC is the maximum legal price that a firm can charge! D QS Qe QD Q Excess Demand HUTECH Institute of International Education Why impose a Price ceiling? • To keep the price down to an acceptable level • During wartime price controls may be imposed on essential items such as petrol, rice etc • To help the poor & the disadvantaged HUTECH Institute of International Education A market with a price ceiling (a) A price ceiling that is not binding Price (b) A price ceiling that is binding Price Supply Supply Price ceiling $4 Equilibrium price $3 Equilibrium price Price ceiling Demand Shortage Equilibrium quantity 100 Quantity of Ice-Cream Cones ➔ No effects on the price or quantity sold HUTECH Institute of International Education Quantity supplied Demand Quantity demanded 125 75 Quantity of Ice-Cream Cones ➔ The ration mechanism – not desirable Control on Prices Lines at the gas pump • 1973, OPEC raised the price of crude oil – Reduced the supply of gasoline – Long lines at gas stations • What was responsible for the long gas lines? – OPEC: created shortage of gasoline – U.S government regulations: price ceiling on gasoline • Before OPEC raised the price of crude oil – Equilibrium price - below price ceiling: no effect • When the price of crude oil rose – Reduced the supply of gasoline – Equilibrium price – above price ceiling: shortage Lines at the gas pump P S1 P S2 S1 P2 PC PC P1 E Ceiling price P1 Ceiling price D Q1 Lượng When OPEC remains Q, Q2 QC Q1 Lượng P1 < Ceiling price - When OPEC increases P → reduces Q → S curve move to the left → No effect on P or Q - Without Ceiling Price?? - With Ceiling price? Why lines at gas pump? HUTECH Institute of International Education Control on Prices Rent control in the short run and the long run • Price ceiling: rent control – Local government - ceiling on rents – Goal: help the poor (housing more affordable) – But what’re the real effects? Rent control in short and long run In short run: Rent price D S ✓ Number of rent houses are considered unchanged (because landlord cannot change these number in short time) → S curve is vertical Ceiling price PC Shortage Q No of houses rent SHORT TERM HUTECH Institute of International Education ✓Tenants may not be responsive to rents because of living habit, they need time → D curve is relatively slope ✓S and D curves for apartments are relatively inelastic → Small shortage 10 ... the price or quantity sold HUTECH Institute of International Education Quantity supplied Demand Quantity demanded 125 75 Quantity of Ice-Cream Cones ➔ The ration mechanism – not desirable Control... policymakers believe that the market price is unfair to buyers and sellers ▪ Result in government policies, i.e price ceilings and price floors HUTECH Institute of International Education Control on Prices... A price ceiling that is binding Price Supply Supply Price ceiling $4 Equilibrium price $3 Equilibrium price Price ceiling Demand Shortage Equilibrium quantity 100 Quantity of Ice-Cream Cones ➔