market disequilibrium
DESCRIPTION
Market Disequilibrium. Price Ceilings and Price Floors cause market disequilibrium because they disrupt the natural dynamics of the marketplace (supply and demand). Price Ceiling. A legal maximum on the price at which a good can be sold. - PowerPoint PPT PresentationTRANSCRIPT
Market Disequilibrium
Price Ceilings and Price Floors cause market disequilibrium because they disrupt the natural dynamics of the marketplace (supply and demand)
Price Ceiling A legal maximum on the price at which a good can be sold.
(if government feels that the price for a good or service is too high)
Examples: Rent Control for apartments Electricity (NS Power)…Monopoly
PROS (Purpose)- Help the poor by
making housing more affordable
- Prevent prices from becoming unreasonably high…especially in cases of Monopolies
CONS- Landlords cannot keep up
with rising costs of maintenance. (which have not been frozen)
- Market inefficiency (shortages)
Case A No Point in having a price
ceiling.
Therefore, it is important to know where the equilibrium
point is before a price ceiling is established…
Case B Typical Price Ceiling Scenario
Example – Gasoline Prices.
An increase in the price of crude oil – shifts the supply curve of gasoline to the left in case (b). This results in a shortage of gasoline (excess demand)…causing motorists to wait for
hours to buy only a few gallons of gas.
Price Floor A legal minimum on the price at which a
good or service can be sold. Very common example: Minimum Wages
PROS (Purpose)- Help reduce the amount
of poverty and raise living standards (avoid sweatshop conditions)
- Help people keep up with the rise of inflation (they raise it from time to time)
CONS- Disrupt market
equilibrium (surpluses)- Increases
unemployment
If left to forces of supply and demand, more workers would be hired at lower wages.
Price Floor - Surpluses
http://www.youtube.com/watch?v=zjXwvQz7f2o
Benefits the producers.