Market Equilibrium and Price Controls
Question Description
Marketsseek equilibrium, and the demand for goods and services will come to anequilibrium with supply of goods and services. When markets are not inequilibrium, surpluses and shortages, as well as underground markets,can exist. Sometimes, the government may want to intervene in marketsto try to help reduce economic hardships.
What is the difference between aprice floor and price ceiling? According to the laws of demand andsupply and how market equilibrium, efficiency, and equity are reached,do attempts to repeal those laws and market results with price floorsand price ceilings justify legislative bodies to implement pricecontrols?
Reviewthe mechanics of supply and demand. Disequilibrium between supply anddemand will occur if price is above (surpluses) or below (shortages).Why does a price floor lead to surpluses? Why does a price ceiling leadto shortages? Review consumer and producer surplus. A price floorwill lead to a transfer of consumer surplus to producer surplus; a priceceiling will lead to a transfer of producer surplus to consumersurplus; both price regulations lead to deadweight losses, which is aloss of surplus to society. Why?
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