Price Ceilings and Floors

Price Ceilings 0 A price ceiling sets the highest price that can be charged for a good or service. The price is generally set below the equilibrium price and results in a shortage. 0 Rent control is an example of setting a price ceiling. Some cities instituted rent controls when housing prices were rising rapidly and current city residents could no longer afford rent. 0 Rent controls have resulted in a shortage of apartments because they require owners to accept a price that is lower than the equilibrium price. Rather than accept the low price, owners often convert the apartments to condominiums and sell them, thus decreasing the supply of available apartments.

Price Floors 0 A price floor sets the lowest price at which one can buy a good or service. Price floors are generally set above the equilibrium price and result in a surplus. 0 Milk support pricing is an example of setting a price floor. Government wanted to be sure that dairy farmers would be guaranteed a price high enough to keep them in business. Since the price is higher than the equilibrium price, consumers buy less milk and dairy farmers supply more milk, creating a surplus of milk.

Impact of Human Capital on Production Costs

Human Capital 0 When people improve their knowledge and skills through education and/or experience, it is called an investment in their human capital. 0 Higher skilled workers increase productivity by producing more in the same period of time than lower skilled workers. 0 Increases in productivity tend to lower cost of production. If four workers can accomplish the same amount of work in a day as five workers, this is an increase in productivity which saves the business the wages of one worker.

Benefits of being more productive 0 Workers who invest in their own human capital generally become more productive. Productive workers lower the cost of production, thus employers seek to hire the more productive workers. Workers with more knowledge and skill generally earn more than unskilled workers. 0 The demand for workers is derived from the demand for the goods and services they make. When demand for a good or service falls, demand for the workers who produce the good or service falls; when demand for a good or service rises, demand for the workers does too.

How are wages and prices impacted by supply and demand?

Wages 0 An increase in the supply of workers with a specific skill tends to decrease their wages, while a limited supply of such workers tends to increase wages. (Don’t become obsolete!)

Prices 0 According to the law of demand, people buy more at lower prices and less at higher prices. All else being equal, prices rise with an increase in demand and fall when demand decrease. Demand is affected by non-price factors such as changes in the number of consumers, consumer income, taste, expectations, and the price of related goods (i.e., complements and substitutes). 0 Prices fall with an increase in supply and rise with a decrease in supply. Supply is affected by changes in the number of suppliers, cost of production, technology, expectations, government policies, and catastrophic events (e.g., hurricanes or wars).