Price ceiling

Examples of Price ceiling in the following topics:

• Price Ceilings

  • A price ceiling is a price control that limits how high a price can be charged for a good or service.
  • A price ceiling is a price control that limits the maximum price that can be charged for a product or service.
  • An example of a price ceiling is rent control.
  • By definition, however, price ceilings disrupt the market.
  • By setting a maximum price, any market in which the equilibrium price is above the price ceiling is inefficient.

• Price Ceiling Impact on Market Outcome

  • A binding price ceiling will create a surplus of supply and will lead to a decrease in economic surplus.
  • A price ceiling will only impact the market if the ceiling is set below the free-market equilibrium price.
  • This is because a price ceiling above the equilibrium price will lead to the product being sold at the equilibrium price.If the ceiling is less than the economic price, the immediate result will be a supply shortage.
  • An effective price ceiling will lower the price of a good, which means that the the producer surplus will decrease.
  • Prolonged shortages caused by price ceilings can create black markets for that good.

• Introduction to Deadweight Loss

  • In a perfectly competitive market, products are priced at the pareto optimal point.
  • The chart above shows what happens when a market has a binding price ceiling below the free market price.
  • Without the price ceiling, the producer surplus on the chart would be everything to the left of the supply curve and below the horizontal line where y equals the free market equilibrium price.
  • With the price ceiling, instead of the producer's surplus going all the way to the pareto optimal price line, it only goes as high as the price ceiling.The consumer surplus extends down to the price ceiling, but it is limited on the right by Harberger's triangle.
  • The consumer would purchaser more of the product at the ceiling price, but the producers are unwilling to supply enough to meet that demand because it is not profitable.

• Understanding and Finding the Deadweight Loss

  • The deadweight loss equals the change in price multiplied by the change in quantity demanded.
  • However, if one producer has a monopoly on nails they will charge whatever price will bring the largest profit.
  • An example of deadweight loss due to taxation involves the price set on wine and beer.
  • This graph shows the deadweight loss that is the result of a binding price ceiling.
  • Policy makers will place a binding price ceiling when they believe that the benefit from the transfer of surplus outweighs the adverse impact of the deadweight loss.

• Impacts of Price Changes on Consumer Surplus

  • Consumer surplus decreases when price is set above the equilibrium price, but increases to a certain point when price is below the equilibrium price.
  • Consumer surplus is defined, in part, by the price of the product.
  • A binding price ceiling is one that is lower than the pareto efficient market price.
  • When a price floor is set above the equilibrium price, consumers will have to purchase the product at a higher price.
  • An increase in the price will reduce consumer surplus, while a decrease in the price will increase consumer surplus.

• Evaluating Policies

  • Subsidies: The government can utilize subsidies to reduce price points and increase the overall supply within a system .
  • Price Floors/Ceilings: Price floors provide a minimum price point for a given product while price ceilings create a maximum price point.
  • These are used to ensure appropriate pricing in a given industry (see ), and are often used in agriculture to control price points.
  • Import Quotas: Policy makers often implement quotas in agriculture to retain more control over prices and protect domestic incumbents.
  • This is useful in controlling food prices, reducing waste, enabling efficiency and avoiding biosecurity issues.

• Settling the List Price

  • A list price must be close to the maximum price that customers are prepared to pay and yield the maximum profit for the retailer.
  • Pricing is a key variable in micro-economic price allocation theory and part of the four "P's-" of the marketing mix; pricing, product, promotion and place.
  • The manufacturer's suggested retail price (MSRP), list price or recommended retail price (RRP) of a product is the price which the manufacturer recommends to the retailer.
  • Value to the customer should be taken into consideration in addition to pricing objectives, profit maximization, geographic and buying habit considerations, discounting, rate of return, competitive indexing, the image conveyed by the price, customer price sensitivity, any legal restrictions, the category price points, price ceilings and floors and how payment is to be made.
  • A good pricing strategy is one that strikes a balance between the price floor (the price below which the organization ends up in losses) and the price ceiling (the price beyond which the organization experiences a no demand situation).

• Arguments for and Against Government Price Controls

  • Well designed price controls can do three things.
  • Finally, when shortages occur, price controls can prevent producers from gouging their customers on price.
  • By keeping prices artificially low through price ceilings, consumers demand a higher quantity than producers are willing to supply, leading to a shortage in the controlled product.
  • Price floors often lead to surpluses, which can be just as detrimental as a shortage.
  • Justify the use of price controls when certain conditions are met

• Regulation of Natural Monopoly

  • Average cost pricing: As the name implies, this regulatory approach is defined as enforcing a price point for a given product or service that matches the overall costs incurred by the company producing or providing.
  • This reduces the pricing flexibility of a company and ensures that the monopoly cannot capture margins above and beyond what is reasonable.
  • Price ceiling:Another way a natural monopoly may be regulated is through the enforcement of a maximum potential price being charged.
  • A price ceiling is a regulatory strategy of stating a specific product or service cannot be sold for above a certain price.
  • In these circumstances the regulatory approaches above (price ceilings, average cost pricing, etc.) are even more critical to ensuring consumers are protected.

• Other Inputs to Pricing Decisions

  • Factors to consider in pricing include Economic Value added to Customers (EVC), competitor's pricing, and government regulations.
  • Therefore, to sell a product, a firm needs to price at or below its competitor's price plus the value advantage its product has to the customer over the rival product.
  • The price of two servers from the competitor is $6,800.
  • Price controls are governmental restrictions on the prices that can be charged for goods and services in a market.
  • There are two primary forms of price control, a price ceiling, the maximum price that can be charged, and a price floor, the minimum price that can be charged .