Price floors and ceilings can impact industries in several ways:
1. Price ceilings below market prices can cause shortages, lower quality, wasteful lines and searches, loss of gains from trade, and misallocation of resources.
2. Price floors above market prices can cause surpluses, loss of gains from trade, wasteful increases in quality, and misallocation of resources.
3. While intended to help buyers and sellers, price controls distort market signals and eliminate incentives, leading to inefficiencies in production and consumption.
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Effect of Price Floor and Ceiling On Agriculture
1. Effect of Price Floor and Ceiling
on Agriculture and Petroleum Industry
Submitted by:
Imran Abdul Qadir (SP12-EX-0060)
Shoaib Ahmed (SP 12-EX-0085)
Imtiaz Sheikha (SP11-EX-0005)
Muhammad Talha (SP11-EX-0004)
Faisal Ashraf Ali (SP11-EX-0010)
Submitted To:
Mr. Shujaat Mubarak
2. INTRODUCTION
In this presentation, we have highlighted the effect of price
flooring and price ceiling on agriculture and petroleum sector.
That whats effects occur on industry.
This presentation consist bit introduction of price flooring
and ceiling, then some related application alongwith effects
indications.
3. Price Ceiling and Price Flooring
These are usually enacted when policymakers believe
the market price is unfair to buyers or sellers.
The government can enact
Price ceilings, and
Price floors.
4.
Price ceilings that involve a maximum
price below the market price create five
important effects on industry.
1.
2.
3.
4.
5.
Shortages
Reduction in Product Quality
Wasteful Lines and Other Costs of Search
Loss of Gains from Trade
Misallocation of Resources
5. (a) A Price Ceiling That Is Not Binding
Price
Supply
40
Price
ceiling
33
Equilibrium
price
Demand
0
100
Equilibrium
quantity
Quantity
6. Price Ceilings Create Shortages
Price
Supply
Market Equilibrium
Shortage
Controlled
Price
(Ceiling)
Demand
Quantity
Qsupplied at the
Controlled Price
Qdemanded at the
Controlled Price
7. 1.
When prices are held below the market price shortages
are created.
The shortage = difference between the Qd and the Qs at
the controlled price.
The lower the controlled price relative to the market
equilibrium price, the larger the shortage.
8. (a) The Price Ceiling on product Is Not Binding
Price
Supply,S1
1.When,
the price
ceiling
is not
binding . . .
Price ceiling
P1
Demand
0
Q1
Qty
9. (b) The Price Ceiling Is Binding
Price
S2
2. . . . but when
supply falls . . .
S1
P2
Price ceiling
3. . . . the price
ceiling becomes
binding . . .
P1
4. . . .
resulting
in a
shortage.
Demand
0
QS
QD Q1
Quantity
10. 2.
At the controlled price, sellers have more
customers than goods.
In a free market, this would be an opportunity to
profit by raising prices.
But when prices are controlled, sellers cannot.
Sellers respond to this problem in two ways:
Reduce quality
Reduce service
11. Price Ceilings Create Wasteful Lines
Price
Supply
Total Value of
Wasted Time
Time Cost
Willingness to
Pay
Market Equilibrium
Shortage
Controlled
Price (Ceiling)
Demand
Quantity
Qsupplied at the
Controlled Price
12. 3.
Price controls that create shortages
lead to bribery and wasteful lines.
Shortages: not all buyers will be able to
purchase the good.
Normally, buyers would compete with
each other by offering a higher price.
If price is not allowed to rise, buyers must
compete in other ways.
13. Industry will not supply the best and result will
be:
How I Can Supply you Petrol at low Profit margin.
14.
Dead-weight Loss is the total of lost
consumer and producer surplus when all
mutually profitable gains from trade are
not exploited.
Price ceilings create a dead-weight loss by
forcing Qs below the market Q.
Buyers and sellers would both benefit from trade at a
higher price, but cannot since it is illegal for price to
rise.
15. 4.
Price controls reduce the gains from trade.
Price ceilings set below the market price cause Qs to be
less than the market Q.
When Q is below the equilibrium market Q, consumers
value the good more than the cost of its production.
This represents a gain from trade that would be
exploited (if the market were free).
16. Price Ceilings Reduce the Gains from Trade
Price
Consumer Surplus Shrinks to this
Producer Surplus Shrinks to this
Willingness to
Pay
Market
Price
Supply
Consumer
surplus in
market
equilibrium
Market Equilibrium
Producer Surplus in
equilibrium
Controlled
Price
(Ceiling)
Shortage
Demand
Quantity
Qsupplied
Qmarket
Qdemanded
17. Deadweight Loss (lost gains
from trade)
= Lost Consumer Surplus
+ Lost Producer Surplus
Supply
Willingness to
Pay
Market
Price
Controlled
Price
(Ceiling)
Total
Value of
Wasted
Time
Lost
Consumer
Surplus
Market Equilibrium
Lost
Producer
Surplus
Shortage
Demand
Qsupplied
Qmarket
Qdemanded
18. 5.
Price controls distort signals and eliminate
incentives-- leading to a misallocation of
resources.
Consumers who value a good most are prevented
from signaling their preference (by offering sellers a
higher price.)
So producers have no incentive to supply the good to
the “right” people first.
As a result, goods are misallocated.
19. Price floor: a minimum price allowed by law.
not as common as price ceilings (but still important)
Price floors have four common effects:
1.
2.
3.
4.
Surpluses
Lost gains from trade (deadweight loss)
Wasteful increases in quality
A misallocation of resources
20. (a) A Price Floor That Is Not Binding
Price
Supply
Equilibrium
price
33
Price
floor
20
Demand
0
100
Equilibrium
quantity
Quantity
21. If the government sets a price floor for butter above the
equilibrium market price, what will be the effect?
a)Farmers will produce less butter and consumers will
purchase more, resulting in a shortage of butter.
b)The supply of butter will increase and the demand will
decrease.
c)Farmers will produce more butter and consumers will
purchase less, resulting in a surplus of butter.
d)The equilibrium price will rise to the price floor.
21
22. (b) A Price Floor That Is Binding
Price
Supply
Surplus
40
Price
floor
33
Equilibrium
price
Demand
0
80
120
Quantity Quantity
demanded supplied
Quantity
23.
A binding price floor causes . . .
a surplus, because quantity supplied is greater than
quantity demanded.
non-price rationing, which is an alternative
mechanism for rationing the good, using
discrimination criteria.
Examples: The minimum wage, agricultural support price
and Royalties.
25. Rate
Surplus of stock
Minimum
Wage
Consequences:
1.Demand falls between 1
and 3 percent for every 10%
increase in the minimum
wage / support price
Supply 2.The total income of
consumer rises
•Some consumer change
their requirement
•Opportunities for sale are
reduced
•A lot of them are from
middle-class families
demand
0
Quantity
demanded
Quantity
supplied
Quantity
26.
Price controls that create surpluses lead to wasteful increases in quality.
Supply
Price
Deadweight
Loss
Controlled
Price (Floor)
“Quality”
Waste
Market Equilibrium
Willingness
to Sell
Demand
Quantity
Qdemanded at the
Controlled Price
If they can’t lower price, sellers will find other ways to compete!
27.
The equilibrium quantity increases
The price paid by buyers falls
The price received by sellers increases
So, buyers gain
So, sellers gain too
The total gain = the total subsidy
Which side gains how much depends on the
price elasticities of demand and supply
27
28.
Higher quality raises costs and reduces seller profit.
Buyers get higher quality, but would prefer a lower price.
Price floors encourage sellers to waste resources:
higher quality than buyers are willing to pay for
29.
The price floor and ceiling are being necessary to
control prices of essentials otherwise not
affordable for middle and lower class.
It is also effecting to petroleum and agriculture
industry badly because they produce essential
and government cannot afford high rates of
these products.
Editor's Notes
Instructor Notes: Figure 6.1: Price Ceilings Create Shortages
At the controlled price, the quantity demanded exceeds the quantity supplied, creating a shortage.
It should be noted that price is not allowed to rise to eliminate the shortage as would be the case in a free market.
Instructor Notes:
Instructor Notes:
Instructor Notes: Figure 6.2: Price Ceilings Create Wasteful Lines
At Qsupplied the willingness to pay is greater than the controlled price. The difference between what buyers are willing to pay and what sellers can charge encourages buyers to line up to buy the good. Buyers will lineup until the total price of the good, the out-of-pocket price plus the time cost, increases to the willingness to pay. Time spent waiting in line is wasted time. The total value of the wasted time is given by the time cost per unit multiplied by the quantity bought.
Instructor Notes:
Instructor Notes: It may be necessary to remind students of opportunity costs here. Wages are a good estimate of the opportunity cost of someone’s time.
Instructor Notes:
Instructor Notes:
Instructor Notes: Figure 6.3 Price Ceilings Reduce the Gains from Trade
At quantities between Qsupplied and Qmarket, the willingness to pay is greater than the cost of production. Although mutually profitable, these trades are illegal. If all mutually profitable trades were legal, the gains from trade would increase by the green plus blue triangles.
The lost gains from trade represent a dead-weight loss.
Instructor Notes: Figure 6.3 Price Ceilings Reduce the Gains from Trade
At quantities between Qsupplied and Qmarket, the willingness to pay is greater than the cost of production. Although mutually profitable, these trades are illegal. If all mutually profitable trades were legal, the gains from trade would increase by the green plus blue triangles.
The lost gains from trade represent a dead-weight loss.