Question

Markets seek equilibrium, and the demand for goods and services will come to an equilibrium with supply of goods and services. When markets are not in equilibrium, surpluses and shortages, as well as underground markets, can exist. Sometimes, the government may want to intervene in markets to try to help reduce economic hardships. What is the difference between a price floor and price ceiling? According to the laws of demand and supply and how market equilibrium, efficiency, and equity are reached, do attempts to repeal those laws and market results with price floors and price ceilings justify legislative bodies to implement price controls? Review the mechanics of supply and demand. Disequilibrium between supply and demand will occur if price is above (surpluses) or below (shortages). Why does a price floor lead to surpluses? Why does a price ceiling lead to shortages? Review consumer and producer surplus. A price floor will lead to a transfer of consumer surplus to producer surplus; a price ceiling will lead to a transfer of producer surplus to consumer surplus; both price regulations lead to deadweight losses, which is a loss of surplus to society. Why?

Answer 1

This problem belongs to various questions regarding demand and supply, Equilibrium, price control, producers and consumers surplus, deadweight loss and market efficiency.

I will explain each answer one by one---------

# Market equilibrium-----

Market Equilibrium occurs when demand curve (-ve sloped)& Supply curve (+ve sloped) intersect each other.It determines the equilibrium Quantity and Equilibrium price in the market.

# Difference between price ceiling and price floor----

Price ceiling and price floor are both forms of price controls imposed by govt.

* Price ceiling is maximum legal price that can be charged by producers / firms while price floor is minimum legal price that can has to be paid to producers.

* Price ceiling creates shortages when legal price is less than market Equilibrium price.While in case of price floor , surplus is generated when price floor is more than Equilibrium price.

* Example for price ceiling is rent control for apartments or flats while the same for price floor is minimum wage for labour.

# Market equilibrium-----

Market Equilibrium or profit maximixing point occurs when marginal revenue (MR) equals to marginal cost( MC). At this point, the producer is at Equilibrium,that is his profits are maximum/ losses are minimum.so, it is the point where there is big gap between TR And TC.

MR=MC

# Market equity and efficiency-------

It occurs where price ( average revenue) is equal to Marginal cost( MC)

P=MC

Basically ,market efficiency is to produce with an objective of sales maximisation not profit maximisation.

# Justification of price control by legislative bodies---------

Price controls ----- price ceiling and price floor are imposed by govt .

Price ceiling is maximum price which a firm can charge from customers,it is done to protect consumer as there are some goods which have more demand but the supply is limited. If market demand and supply forces are allowed to determine price, the Equilibrium price will be too high to be affordable by consumer.So ,the govt imposes price ceiling,mainly below the Equilibrium price.

Similarly in case of price floor, the govt intervenes market Equilibrium price to protect producers by imposing minimum support price ,as in the case of labour.As there is mass unemployment, the supply of labour is much more than demand for labour,and if market forces of demand for labour and supply of labour work, the wage rate will be too low ,so to protect workers the govt imposes price floor above the equilibrium price ( wage rate).The same is done to protect farmers for their produce.

# price floor leads to surplus when price floor is above the Equilibrium price.It happens because at the price floor, demand is less than supply.

Price ceiling leads to shortage when the legal price is below the equilibrium price.and at that point, supply is less and demand is more.

#Consumer and producers surplus------

Consumer surplus is the difference between the price what the consumer is willing to pay and what he actually pays.

Producers surplus is the difference between the price what a producer actually gets and what minimum price ( covering cost), he is willing to get.

# Price floor leads to tranfer of consumers surplus to producers surplus---------

When price floor is imposed, the producing firms get govt protection as they will receive more price than Equilibrium price.This leads to increase in their surplus but the consumers are loosers in this case as they have to pay more price than Equilibrium price so some portion of their surplus moves towards producers.

# Price ceiling leads to transfer of producers surplus to consumers surplus--------

When govt imposes maximum legal price to be charged from customers, the consumers gain while the producers are loosers because Equilibrium price was above the legal price,which lead to more benefit to consumers as they have to pay less as compared to Equilibrium price.So, the consumers enjoy more surplus at the cost of producers.

# Deadweight loss in price control -------

Deadweight loss is the loss occuring to society due to less availability of goods and services as compared to Quantity occuring as per market Equilibrium.

When price countol ----- price ceiling or price floor is imposed by govt ,there is surplus or shortage of output .As the Equilibrium output does not occurs, the demand is more than supply in case of price ceiling while supply is more than demand in case of price floor.

In both cases ,the efficient Quantity of goods or services do not reach to community , so there is a deadweight loss in both cases.