Macroeconomics LP4 Assignment A price ceiling is a sort of price control governments have imposed to control the price when the price is higher than it should be. Sellers try to sell more of their product because the price is high. But buyers do not want to buy at that price. Price ceilings commonly lead to shortages and are typically associated with long lines. When a new toy or video game comes out there is usually some kind of wait, whether in line or on a waiting list.
When “tickle me Elmo” came out people where selling them on eBay for at least four times the retail price and in many cases much higher, creating a sort of black market for products deemed unattainable by supply and demand to the masses. The people with enough money to afford the new product also must have the time to wait and those without either time or money will not pursue the item but instead will look for alternatives like the older version of the product because that product will be much cheaper because there is a newer version.
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This is similar to when a new model car comes out the older model is discounted (this economy being what it is, so cars a year or two older cost the same as newer models because people are keeping their older cars longer and dealer ships want you to buy newer cars for a bigger profit), this is usually true but for some instances it is not, like antiques. Imagine this happening to everyday products like milk or eggs, waiting in lines for breakfast. Somehow, it must be determined who will get the product and who will not.
Price ceilings provide a gain for buyers and a loss for sellers. The price floor is when the price is lower than it would naturally be so buyers want a lot of the product. But sellers can’t make as much money so they don’t want to sell the product. This can make it harder for buyers to get any of the products they want. Sellers produce more products than consumers want to buy at prices that will allow the seller to make a profit. Consumers lose in that they pay higher prices and also that they buy less because of the higher price.
Due to technological advances, the supply of certain products has increased greatly, but the demand for the products has increased much less. The result is that prices have been falling, with falling prices comes a lower profit to the producer. Price floors always produce a surplus; there are many ways to solve the problem of surpluses. Government becomes a buyer and purchases the surplus, potentially raising our taxes and giving sellers a green light to over produce.
Once the surplus has been purchased, to get rid of the surplus, the government tries to raise the demand for surplus products. For example, a proposed requirement that 10% of gasoline be ethanol would increase the demand for corn greatly and the school lunch program also helps to increase the demand for agricultural products. The government can also issue specific product standards to insure quality control. When supply is greater than demand, rationing will automatically exist. Price will assume the position of rationer when other types of rationing are absent.
If a product or service is really expensive, only the rich will be able to afford it and those that can’t afford it, don’t get to have the product. Gas I think is a good example, you don’t have to be rich to buy gas but those with less income will use alternatives like utilizing public transportation, trading in or selling a SUV for a smaller car that uses less gas and carpooling. So there is no need for price control, those that want gas at the current price can purchase as much as the like will those with less means learn and adapt to going without or reducing usage.