1. Managerial Economics-Charles W. Upton Price Ceilings

2. The effect of a price ceiling An unregulated product sells for P o. Sales are Q o. P Q PoPo QoQo S D

3. Price Ceilings The effect of a price ceiling An unregulated product sells for P o. Sales are Q o. Suppose the government sets a maximum price P max P Q PoPo QoQo S D P max

4. Price Ceilings The effect of a price ceiling An unregulated product sells for P o. Sales are Q o. Suppose the government sets a maximum price P max P Q PoPo QoQo S D P max Shortage! Qs1Qs1 Qd1Qd1

5. Price Ceilings The effect of a price ceiling An unregulated product sells for P o. Sales are Q o. Suppose the government sets a maximum price P max P Q PoPo QoQo S D P max Shortage! Qs1Qs1 Qd1Qd1 There is more to the story

6. Price Ceilings The effect of a price ceiling People try to evade the ceiling P Q PoPo QoQo S D P max

7. Price Ceilings The effect of a price ceiling People try to evade the ceiling. If suppliers, they shift their supply curve up by $ Evade P Q PoPo QoQo S D P max $ Evade, the cost of evading

8. Price Ceilings The effect of a price ceiling People try to evade the ceiling. If suppliers, they shift their supply curve up by $ Evade P Q PoPo QoQo S D P max Q1Q1

9. Price Ceilings The effect of a price ceiling People try to evade the ceiling. If suppliers, they shift their supply curve up by $ Evade P Q PoPo QoQo S D P max Q1Q1 Price goes up

10. Price Ceilings The effect of a price ceiling People try to evade the ceiling. If suppliers, they shift their supply curve up by $ Evade P Q PoPo QoQo S D P max Q1Q1 No Shortage!

11. Price Ceilings The effect of a price ceiling How big is this shift? P Q PoPo QoQo S D P max Q1Q1

12. Price Ceilings The effect of a price ceiling How big is this shift? If the regulations are a joke, $ Evade is small. P Q PoPo QoQo S D P max Q1Q1

13. Price Ceilings The effect of a price ceiling How big is this shift? If the regulations are a joke, $ Evade is small. P Q PoPo QoQo S D P max Q1Q1 Small increase over market price.

14. Price Ceilings The effect of a price ceiling How big is this shift? If the regulations are tough and toughly enforced, $ Evade can be quite large P Q PoPo QoQo S D P max Q1Q1

15. Price Ceilings The effect of a price ceiling How big is this shift? If the regulations are tough and toughly enforced, $ Evade can be quite large P Q PoPo QoQo S D P max Q1Q1 Then the regulations have a major impact.

16. Price Ceilings The effect of a price ceiling How big is this shift? If the regulations are tough and toughly enforced, $ Evade can be quite large P Q PoPo QoQo S D P max Q1Q1 Moral: if you are given the job of enforcing a price ceiling, don’t work too hard at your job.

17. Price Ceilings End ©2004 Charles W. Upton