Transcript Ceilings and Floors The Role of Prices • Convey information – When “Tickle Me Elmo”s went up in price form about $30 to.

Ceilings and Floors
The Role of Prices
• Convey information
– When “Tickle Me Elmo”s went up in price
form about $30 to $300, it told us something
about the popularity of the doll
• Rationing device
– The price is what determines who can have the
good
Rationing Devices
• What are other rationing devices?
– First Come-First Served
– Alphabetical
– The government could decide who needs it the
most
– Height
– Gender
– etc.
Disequilibrium Behavior
• Is it possible for the price and quantity to
NOT be in equilibrium?
• Yes - While the invisible hand may move
price towards equilibrium, there are two
types of forces that keep the price away
from equilibrium
• We will call these “The Invisible Foot” and
“The Invisible Handshake” (thanks for David Colander
for these names!)
The Invisible Foot
• This is government interference with prices
in the market.
• The government does this quite often. For
instance you may notice that at UDF they
advertise that they sell milk and beer at
“state minimum prices” meaning that the
state will not allow prices on milk and beer
to be below a set amount.
Price Controls
There are two types of price controls - Price
Ceilings and Price Floors
Price Ceilings
• Price Ceiling - sets a maximum price that is
allowed by law.
• Result of Price Ceiling:
– Stay at a permanent shortage situation
• Note that a price ceiling can be any price
the government chooses. It is, however only
effective if it is below the equilibrium price
Price Ceiling
• Example of Price Ceiling
• Rent controlled apartments
• In New York City, San Francisco, Boston,
and other cities the city or state determines
the maximum amount that can be charged
for rent on many apartments.
• A maximum price is a price ceiling
Rent Controlled Apartments
Rent Controlled Apartments
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Rent Controlled Apartments
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Rent Controlled Apartments
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Rent Controlled Apartments
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Rent Controlled Apartments
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Pceiling
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Qs
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Amount of Shortage
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Winners and Losers
Who gains and loses with price ceilings:
• 1. Benefit - those who get rent controlled
apartments
• 2. Loses - those who can’t find apartments
due to the shortage.
• 3. Loses - landlords who must accept lower
rent.
Price Floors
• Price Floor - sets a minimum price that is
allowed by law.
• Result of Price Floor
• Stay at a permanent surplus situation
• Note that a price floor can be set at any
price, but is only effective if it is above the
equilibrium price
Price Floors
• Example of Price Floor
• Minimum Wage Legislation
• The minimum wage is a lowest price the
government will allow firms to pay for
labor.
• A minimum price is a price floor
Price Floors
• When we look at the labor market it is
similar to other supply and demand
diagrams except for the labels.
• L - quantity of workers
• w - wages (the price we pay workers)
• It is also different because the suppliers of
labor are households, not firms and the
demanders of labor are firms, not
households
Winners and Losers
Who gains and loses with price floors:
• 1. Benefit - those who get higher wages
• 2. Loses - those who can’t find jobs at the
higher wage
• 3. Loses - firms who must pay higher
wages.
Minimum Wage Legislation
Minimum Wage Legislation
Wage
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# of Workers
Minimum Wage Legislation
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# of Workers
Minimum Wage Legislation
Wage
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# of Workers
Minimum Wage Legislation
Amount of Unemployed
Workers
Wage
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Invisible Handshake
• The Invisible Handshake is social pressure that
often prevents price from reaching equilibrium
• For instance, let’s think about what happened
recently when Bruce Springsting played Music
Hall downtown.
• Tickets sold out in hours and there many people
who wanted to get tickets than were able to buy
them from Ticketmaster
Invisible Handshake
• What does that say about the price of the
tickets?
• Were the tickets priced below or above
equilibrium price?
– Below, since there was a shortage
• So why weren’t prices at the equilibrium
price?
– Bruce didn’t want alienate fans
– It is not considered “right” to charge so much
Invisible Handshake
• Another example of the Invisible
Handshake is with transplant organs
• There are not enough organs for all the
people who need them
• This means the price of an organ is below
the equilibrium
• Why don’t hospitals and doctors raise the
price to equilibrium?
Rationing Devices
• When a market it out of equilibrium, price
is not always working as a rationing device.
Think about what might be the rationing
device for our examples
– Tickets to the concert
– Rent controlled apartments
– Transplant Organs