Price Ceiling
Price ceiling: no more than a dollar a square foot in rent. And yes, it’s called rent control.
Price floor: you can’t sell arsenic for less than $100/gallon, because, well, probably too many people would die if they drank it.
So yeah…when the government sets a maximum price for something, that’s called a price ceiling. The rent control measures in New York City establish a price ceiling for the rental rates of certain buildings, built in certain times, with certain tenants. The process is rife with corruption (many wealthy people live in these rent-controlled buildings), but for our purposes, just know that they set a max rental rate, and that’s a price ceiling.
The intention behind setting a price ceiling is arguably a good one: a certain good or service has become so expensive that it’s nearly impossible for many people to afford, so we want to make it more affordable. How many times have we said to ourselves, "I wish this thing that I need was cheaper?" Price ceilings are the government’s way of trying to make that wish come true. But, like all things literary, there’s a price to pay for trying to defy gravity.
Of course, setting a price cap can deliver unintended consequences. If a price ceiling is set below the equilibrium price for that good or service, a shortage results. What’s an equilibrium point? In economic terms, it’s where supply and demand meet. It shows how supply changes as prices change: that’s the supply curve. If there’s a lot of demand for a given product at a given price, if it makes sense to produce more, than producers will…produce more. Duh. Then there's the demand curve, which shows how demand changes as prices change. Where the two curves intersect is the equilibrium point. It’s where the market reaches a balance between supply and demand. That is, it’s where the prices are such that sellers and buyers are both equally happy and unhappy. Kind of like Mom at Thanksgiving.
But what happens if the government mandates the setting of an artificial price? That is, they don’t let the market reach its equilibrium point? Yeah...you get problems. In the case of rent control, you’ve got a price below the equilibrium point. You end up with too much demand for too little supply. Like...who wouldn’t want to pay $400 a month for a beautiful 4-bedroom apartment overlooking Central Park?
Another example. Immediately after a snowstorm, people run to the store to get road salt (if you live in California or anywhere else where changes in weather don’t exist, people put salt on roads so the ice on the roads melts off because, uh… science). In order to make driving and walking conditions safe, the government caps the price of rock salt so that everyone can afford it. And this makes sense, because it would be bad for a whole lot of innocent street-walkers, er, rather, people walking on the street, to have a bunch of road unsalted and icy, and drivers then running into them. In essence, in forcing rock salt prices to be low, the government is protecting a bunch of innocent potential victims. But there is a price to pay in this protection. The low prices mean people bum rush stores and clear ‘em out. The shortage of rock salt comes about because stores can’t meet consumers’ demand.
Let’s say we live in a city where the equilibrium price for a one-bedroom apartment is $1,200, and the government institutes a price ceiling of $1,000. The price cap messes with the market, impacting both supply and demand. Demand is increased, because now there are people who can afford the apartment who couldn’t come up with the cash when it was $200 more expensive. That’s the government’s goal: to let people afford these apartments who otherwise...couldn’t.
But the policy also affects supply. A government price control obviously doesn’t instantly destroy a bunch of apartments. But it changes the incentive structure to make it less profitable to rent out these apartments. Owners will start looking for places to put their resources. They may turn the apartments into condos. They might sell the buildings altogether or try to turn it into retail space. Over the long run, fewer new apartments of this type will be built, because investors aren’t there for the current price structure.
The opposite of a price ceiling is a price floor, which is a government-imposed limit on how low the price of a good or service can go.
Example:
After the Great Depression, the U.S. government instituted several price floors in agricultural markets in an effort to protect farmers from the horrible economy. This was all part of the New Deal...that thing Franky D. came up with to give victims of the Depression. A bit of financial relief.
Let’s bring things forward in time a bit. Pretend the government decided to set a price floor of $5 for the newest iPhone. That means no one could charge less than $5 for the new iPhone. Since new iPhones clearly cost the manufacturer (Apple) more than $5—like, a bunch more—we can say with some confidence that the equilibrium price for an iPhone is higher than the price floor. In this situation, the price floor has pretty much no effect on anything.
Right? Because Apple has no incentive to make any more iPhones if they cost them, say, $200, and the government is telling them they must sell them for more than $5 each. Well, of course they will. iDuh.
But let’s say that price floor was changed from $5 to $500, and now no one can sell an iPhone for under five hundred bucks. That changes things a little, doesn’t it? First of all, most of us are probably not going to run right out and buy a new iPhone. Second, anyone who does pay $500 for their phone is now paying a price that is higher than the equilibrium price. Third, given the dramatic drop in demand, Apple’s going to end up with a major surplus of iPhones, if they don’t do anything about supply. Like…they’d better cut back on supplies, because now this ultra-expensive iPhone is going to have less volume demand than it would if it sold for, say, $300.
Assume the equilibrium price for an iPhone is $250. Apple is selling iPhones at an artificially high price; that is, a price above the equilibrium point. There’s a big gap between where the price floor hits the supply curve and where it hits the demand curve. At $500, Apple wants to make a lot of iPhones. But unfortunately for them, not many people want to buy at this price.
There are benefits and drawbacks to price controls. They can protect consumers by making sure they can afford what they need, and they can protect companies by making sure they won’t go broke producing their goods and services that they might not otherwise make. But they can also lead to economic disequilibrium, where supply and demand are artificially controlled and lead to shortages and surpluses.
Like finding an affordable apartment in the Windy City, instituting price controls involves making some trade-offs.
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Macroeconomics: Unit 1, Price Ceilings a...0 Views
no macro economics Allah shmoop price ceilings and price floors
Yeah here's a price ceiling No more than a dollar
a square foot in rent And yes it's called rent
control And here's a price floor You can't sell arsenic
for less than 100 bucks a gallon because well probably
too many people would die if they drank it Yeah
it's a poison all right so yeah when the government
said some maximum price for something that's called a price
ceiling the rent control measures in New York City establish
a price ceiling for the rental rates of certain buildings
built in certain times With certain end it's The process
is rife with corruption like many wealthy people live in
these rent controlled buildings and take advantage of the system
But for our purposes just know that they set a
max rental rate and that's a price ceiling Like you
know you can rent it for more than whatever per
foot per month Yeah alright The intention behind setting a
price ceiling is arguably good One a certain good or
service has become so expensive that it's nearly impossible for
many normal people to afford So you know the government
wants to make it more affordable Well how many times
have we said to ourselves I wish this thing that
I need was cheaper fry ceilings or the government's way
of trying to make that wish come true But like
all things literary there's a price to pay for trying
to defy gravity Of course setting a price cap can
deliver unintended consequences if a price ceiling is set below
the equilibrium price for that good or service a shortage
of results Alright so what's an equilibrium point In economic
terms it's worth supply and demand meet Check out this
graph again it It shows how supply changes as prices
change That's the supply curve It's on very Kirby here
Just supply line If there's a lot of demand for
given product at a given price well if it makes
sense to produce more thin producers will produce more Yeah
duh Like who doesn't want to make money Now check
out this graph Well It shows how demand changes as
prices change That's the demand curve where the two curves
intersect While that's the equilibrium point right where if supply
equals demand it's where the market reaches a balance between
supply and demand And that is it's where the prices
are such that sellers and buyers are both equally happy
and unhappy with the price they're paying for a given
number of transactions You know kind of like Mama Thanksgiving
equally happy and unhappy But what happens if the government
mandates the setting of an artificial price That is they
don't let the market reach its equilibrium point You know
you got problems all right In the case of Rent
Control you've got a price below the equilibrium point Living
right down here somewhere you end up with too much
demand for too little supply Like who wouldn't want to
pay 400 bucks a month for this beautiful four bedroom
apartment overlooking Central Park Its market price is probably like
20 grand a month Another example Immediately after a snowstorm
people run to the store to get road salt and
if you live in California or Arizona or anywhere else
where changes in weather don't exist people put salt on
roads so the ice on the roads melts off because
you know science In order to make driving and walking
conditions safe the government caps the price of rock salt
so that everyone can afford it And this kind of
makes sense right Because it would be bad for a
whole lot of innocent streetwalkers are rather you know people
walking on the street to have a bunch of road
unsalted and icy and you know driver's running into them
You know it's not good in essence forcing rock salt
prices to be low The government is protecting a bunch
of innocent potential victims but there's a price to pay
for this protection The low prices mean people bum rush
stores and clear amount of supply The shortage of rock
salt comes about because stores simply can't meet consumers The
man All right well let's see what this looks like
on a graph Let's say we live in a city
where the equilibrium price for a one bedroom apartments 1200
bucks and the government institutes a price ceiling of a
grand Well the price cap messes with the market impacting
both supply and demand Demand has increased because well now
there are more people who can afford the apartment who
couldn't come up with the cash when it was $200
Mohr expensive That's the government school toe Let people afford
these nicer apartments who weatherize couldn't But the policy also
effects supply a government Price control obviously doesn't instantly destroy
a bunch of apartments but it changes the incentive structure
making it less profitable for the landlords and the shareholders
of the buildings To rent out those apartments well owners
will start looking for places to put their resource is
other places like not in improvements in the buildings They
may turn the apartments into condos They might sell the
whole building's altogether or try to turn the whole thing
into retail space over the long run Fewer new apartments
of this type will then be built because investors aren't
incentivized to do so The current price structure makes no
sense for him so well that's kind of bad Well
are the opposite of a price Ceiling is a price
floor which is a government imposed limits on how low
the price of a good or service can go Example
Well after the Great Depression the U S Government instituted
several price floors an agricultural markets in an effort to
protect farmers from the horrible economy Well this was all
part of the New Deal you know that thing Frankie
D came up with to give victims of the Depression
about a financial relief Okay so let's bring things forward
In the time of it pretend the government decided to
set a price for five bucks for the newest iPhone
That means no one could charge less than $5 for
the new iPhone Well since new iPhones clearly cost the
manufacturer and mostly apple more than five bucks well like
a a bunch more than five bucks we can say
with confidence that the equilibrium price for an iPhone is
higher than the price floor Well in this situation the
price for has pretty much no effect on well anything
right because Apple has no incentive to make any more
iPhones if they cost them say $200 each and the
government is telling them they must sell them for more
than $5 each So of course they will sell them
for more than $5 each Ida But let's say that
price floor was changed from $5 toe $500 Well now
no one Khun settle an iPhone for under 500 bucks
Well that changes things a bit doesn't it First of
all most of us are probably not going to run
right out and buy a new iPhone for $500 in
second Anyone who does pay 500 bucks for their phone
is now paying a price that is higher than the
equilibrium price Well Third given the dramatic drop in demand
Apple's going to end up with a major surplus of
iPhones If they don't do anything about supply like they'd
better cut back on building more iPhones Because now this
ultra expensive iPhone is going to have less volume demand
then would it If it's sold for say 300 bucks
All right let's look at this on a graph Assuming
the equilibrium price for an iPhone is a $250 Apple
is selling iPhones at an artificially high price That is
above the equilibrium point up here Will you Khun see
the place where the price floor hits the supply curve
You can also see where the price for hits the
demand curve Right here There's a big gap between the
two Well at 500 bucks Apple wants to make a
lot of iPhones but unfortunately for them not many people
want to buy a lot of iPhones at 500 bucks
in thank you very much All right There are benefits
and drawbacks to price controls They can protect consumers by
making sure they can afford what they need And they
can protect companies by making sure they won't go broke
producing their goods and services that they might not otherwise
make But they can also lead to economic disequilibrium where
supply and demand are artificially controlled and lead to shortages
and surpluses And over the long run you want to
kind of let the market do your boss right It's
kind of like finding an affordable apartment in the Windy
City Instituting price controls well it involves making some major 00:08:22.249 --> [endTime] trade offs