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3.5 The Supply and Demand (Price Floors and Ceilings)

Think about how much gas you and your family use every week. If your family owns a car, ask your parents about how many gallons of gas is purchased every week. If you are a driver- how many gallons do you consume every week? Do you ride on a bus or other

Prices send signals and provide incentives to buyers and sellers. When supply or demand changes, market prices adjust, affecting incentives. High prices induce extra production while they discourage consumption. In this exercise, we discover how the imposition of price controls (maximum or minimum prices) interrupts the process that matches production with consumption. Price Ceilings (maximum prices) sometimes appear in the form of rent control, utility prices and other caps on upward price pressures. Price floors (minimum prices) sometimes appear in the form prevailing wages and minimum wages. When government imposes price controls, citizens should understand that some people gain and some people lose from every policy change. By understanding the consequences of legal price regulations, citizens are able to weigh the costs and benefits of the change. As a general rule, price floors create a surplus of goods or services, or excess supply, since the quantity demanded of goods is less than the quantity supplied. Conversely, price ceilings generate excess quantity demanded, causing shortages Price Floors and ceilings can be plotted with supply and demand curves. Use the figure above to answer the questions. Submit your answers.1. What is the market price?$502. What quantity is demanded and what quantity is supplied at the market price? _quantity demanded at market price = 120_quantity supplied at market price = 1203. What quantity is demanded and what quantity is supplied if the government passes a law requiring the price to be no higher than $30? This is called a price ceiling. Quantity Demanded _160_ Quantity Supplied _62_4. Is there a shortage or a...
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