Today’s Warm Up

Why would it be harmful to consumers if a law was passed that prevented the price of bottled water from increasing above 25 cents?

Let’s Review… Not all markets are ones in which price is

allowed to move freely – government may set some price controls

Prices set by a law differ from the equilibrium price

This creates inefficiencies in the market as a shortage or surplus will always occur

Why are price controls inefficient?

Price Ceiling (max. price) A shortage will always

result QS < QD Price is set < Equilibrium Inefficiencies: Consumer

demand is not being met since price serves as a disincentive to producers

Price Floor (min. price) A surplus will always

result QS > QD Price is set > Equilibrium Inefficiencies: Suppliers

are wasting resources by producing too much

Why does this happen?

Rules establishing price don’t change the basic rule that people act in their own best self-interest

However, new rules (price controls) may alter available options

Consumers may make different choices than what they would have in the absence of rules

Activity 1: Wheat Game

Rules will stay the same – except no price can go higher than $3.00

This will make it easier for everyone to purchase wheat… YAY!!! (Right???)

Explain what happened…

A price ceiling was set, and the price of wheat couldn’t exceed $3.00 (Remember, equilibrium price was $6.00 per bushel)

What did you experience during this round of the game?

Secondary Effects of Price Ceilings/Floors

There were more buyers trying to buy than there were sellers trying to sell

Some people made illegal deals by selling for more than $3.00

Some sellers got tired of selling at such bad prices and boycotted the market

In the end, the market wasn’t working very well

LEQ 2 – The BIG concepts Consumers & producers make

economic decisions that are in their own best interests

This is represented by demand and supply and drives the market towards efficiency (equilibrium)

Efficiency is getting the most out of one’s resources at the least cost. In this manner, resources are allocated to their most highly valued use.

Even with the best of intentions, price controls (ceilings & floors) create inefficiencies in the form of shortages and surpluses – WASTED RESOURCES!!!

Activity 2: Think, Pair, Coach

Person A – complete side A Explain your answer to Person B Person B will say “Yes, that’s correct! Great

job!”… Or, they will explain what you did wrong Person B – Complete side B

Explain your answer to Person A Person A will say “Yes, that’s correct! Great

job!”… Or, they will explain what you did wrong Alternate until all questions have been

completed.

Practice Problem

A local law has passed in Middletown, DE preventing rent from increasing above $500. The equilibrium price for rent is $1,000. What will happen?

(circle one)___ Surplus in rent ____ Shortage in rent Provide a graphical representation QS is _________ than QD

Create your own scenario!

On poster paper, create your own price floor or price ceiling scenario like the ones you did in the “coaching” activity. Your classmates will be answering the question, so don’t write in the answers.

Create a key and tape it to the back of your poster

Be as creative as possible but keep it school appropriate