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Chapter 4
Course: Principles Of Economics Ii (ECON 102)
12 Documents
Students shared 12 documents in this course
University: Southwestern College (California)
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PRICE AS A RATIONING DEVICE
A rationing device is a mechanism used to determine who gets what of available limited
goods and resources. One of the most commonly used rationing devices used in a
capitalistic (market-based) economic system is price. Those who are willing and able to
pay the price for a given good (or resource) can purchase it. Other rationing devices are
used, as well. One of the most common is first-come-first-served. One example of this
rationing device occurs when tickets for a popular band go on sale, and the tickets are
sold to those who are first in line (at a real or virtual box office). Another commonly
used rationing device is brute force.
PRICE AS A TRANSMITTER OF
INFORMATION
Price serves purposes other than that of a rationing device. In a market-based
economy, price also transmits information about the relative scarcity of a good. Goods
that are relatively more scarce have a higher price and those that are relatively less
scarce have a lower price.
PRICE CONTROLS
Up until this point in our study of supply and demand, we have assumed that the
government has stayed out of the pricing decisions and allowed prices to adjust to
equilibrium. However, sometimes the government chooses (for a variety of reasons) to
intervene and impose price controls. There are two main types of price controls: price
ceilings and price floors.
PRICE CEILINGS
A price ceiling is the highest price that a product can legally be sold for as determined
by the government. The placement of the price ceiling, in relation to the equilibrium
price, will have a lot to do with whether or not the price ceiling will actually have any
impact on the price the product is sold for. If a price ceiling is set above the equilibrium
price, it will not have an impact on the price the product sells for (since the price ceiling
is not blocking the price from reaching its equilibrium). In order for a price ceiling to
have an impact on the market it must be set below the equilibrium price. See Exhibit 1,
for an example of a price ceiling this would have an impact on the market. A price
ceiling set below the equilibrium price will result in a shortage of the product (the
quantity demanded of the product will exceed the quantity supplied at that price) and
fewer actual exchanges (purchases) of the good will be made than would have been
made at equilibrium. In the absence of a price ceiling, the price would just adjust
upward to resolve the shortage. With the price ceiling, the price cannot legally rise to
its equilibrium level, and some other rationing device will need to be used in order to
resolve the shortage. For example, when gasoline prices rise, you often hear people
suggest that we should have a price ceiling on the price of gas. On the surface this
might sound like a good idea, but think about the impact that this would have on the
market and your everyday life. Would you be willing to wait in very long lines to buy
