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>>All right, welcome back, as we go back into dealing with supply
and demand, where you start talking
about price ceilings and price floors.
Let's start with a price ceiling.
So, what happens when you try to stop prices
from getting too high?
So, suppose supply and demand, where they intersect,
where the equilibrium price is too high for you,
or too high for your society, like, suppose you live
in New York City and you're trying to rent an apartment,
and there's just not that many apartments available,
so the price of apartments out there, rent is extremely high.
What do you do?
Well, you either have to pay the high price
or the government steps in says.
[ Silence ]
We're not going to allow the price of apartments,
in New York, to get over this line.
If you charge more than this, you're breaking the law,
and you can be, you can be sued, basically.
What does that do to the market?
Does that fix the market?
No. What it really does is it forces there to be, what, well,
if this is the price, what's going on?
Here's where this price, this is how much were going
to supply, at that price.
This is how much.
[Silence]
We're going to demand.
We're going to demand way more than the supply.
So, what does a price ceiling do for us?
It leads us into a case where.
[Silence]
We have a shortage.
Generally speaking, price ceilings create shortages.
Do realize that, if you put the price ceiling
above the equilibrium price, somewhere up here, say,
note that this ceiling does nothing,
because the equilibrium price is actually below it.
That's one of those trick type of questions
that might be asked, right, if someone said
that the ceiling was up here,
how does it affect its supply and demand.
In this case, it would be it does nothing, but, for us,
with our ceiling right here below the equilibrium price,
this is forcing a shortage,
because more people are going demand apartments in New York
than there are available to them.
And, what does that lead to, generally speaking,
when you have a shortage?
Well, it usually means that the price is going to go up,
because that's what a shortage means.
But, here, we're not allowing the price to go up,
we're forcing it to stay low, so what you end up winding
up with is illegal transactions, people renting houses
without being, you know, following the rules,
without being a part of a renters association,
lots of other things that shouldn't be occurring,
if you just let the market take over.
All right?
So, what about a price floor?
A price floor is the opposite,
but still the same, to some degree.
[ Silence ]
Here, this would be our equilibrium,
and now we're going say, well, we want to force our price to be
up here, this is the floor.
Why would you set a floor up here?
You'd be protecting your markets, so suppose,
if you will, you, you know, you're in the dairy industry
and the dairy industry is tanking in the United States,
for whatever reason the price of milk and cheese has gone
so far down, that we don't have a way of, you know,
keeping the small farms open.
So, what the government steps in and does, it says, "We will pay,
for any dairy products, at, at least this particular price."
The market would say, you should pay, you know,
two dollars for a gallon of milk, and the government comes
in and says, we'll always pay you at least two-fifty.
What's happens there?
Well, now, at that price, this is what we would demand,
this would be our quantity demanded, this.
[Silence]
Is how much you'd supply.
What happens here?
[Silence]
Surplus. Generally speaking, floors,
price floors force surpluses, they force us to make more
than is reasonable, right?
We should produce roughly this much,
but since the governments going to pay us, at a rate that's way
over what, you know, say,
a regular grocery store might pay us, we're going to go ahead
and produce way more milk than we should, way milk,
more chunks of cheese that we would normally,
because we can always guarantee
that the governments going to buy it.
All right?
Those, folks, are what happens
with price floors and price ceilings.