Unit 4: Seminar – Price Controls
Professor: Vilma Vallillee
August 1, 2012.
Despite the fact that all markets tend to move into equilibrium, there might be occasions when neither buyers, nor sellers are satisfied with that equilibrium. Even at an equilibrium point buyers will contest their cases that prices should be go down, and sellers contest their cases that prices should be raised. On other occasions there might be strong political demands whether to raise or lower prices, but regardless of the situations the government impose price controls to regulate. Price controls can take the form of either price ceiling, or price floors (Krugman & Wells, 2009).
Price ceilings is a cap on prices below the equilibrium price, and they are usually imposed during times of crises, wars, harvest failures, and natural disasters, because prices tend to go up under those conditions. Since price ceilings are usually below the equilibrium price, it causes the demand to increase, and the supply to decrease, which in turn causes inefficiency in the market (Krugman & Wells, 2009). Some of these inefficiencies are; inefficiently low quantity, inefficient allocation to customers, wasted resources, and black markets (Krugman & Wells, 2009). A Price floor causes similar results.
Price elasticity of demand is the percent change on the quantity demanded for a certain product, when the price is changed. The price elasticity demand measures how sensitive a particular market response to price changes (Krugman & Wells, 2009). Income elasticity of demand, just like price elasticity of demand, measures the percent change in the quantity of a particular good demanded that results when consumers increase or decrease their income. For example, income elasticity demand would be a great tool to use when measuring the sensitivity of...