Question

Price Supports and Price Caps (Controls)

Reading Assignment: Textbook, Microeconomics, Chapter 3

1. We-don’t-like-equilibrium policies: price floors and price ceilings. The fundamental problem that each tries to address

2. Price floors – What they are, why they are enacted. And their inevitable consequences.

3. Price ceilings – What they are, why they are enacted, and their inevitable consequences

Income elasticity and Cross Elasticity

Reading Assignment: Textbook, Microeconomics, Chapter 5

4. What Income elasticity measures. Inferior, Normal, and Superiorproducts. Examples. What happens to each over the business cycle?

5. What cross elasticity measures. Substitutes and Complements.

6. How are cross elasticities used in antitrust cases? Examples.

7. Why firms often look for strong complements.  

Answer 1

price floor and price ceilings are type of pricing that we consider as based on equilibrium price .

Equilibrium price in market define that buyer and sellor are ready to exchange goods(quantity) for the particular price as per market force( demand and supply), but this kind of prices create issue in which some people in market affected very much, they might be producer or supplier of product and general public as well.

here we discuss two pricing policy ,: price floor and price ceiling

price floor is pricing policy in which prices are set above the market equilibrium prices to protect the interest of farmer who has to receive price at least in which they can earn sufficient amount of profit or cost which they have incurred. we can call it minimum support prices. it is regulated by government to give benefits to farmers. it maintains the supply of goods in the market and give protection to farmer by providing fair prices of their product.

price ceiling is pricing policy in which prices are set below the market equilibrium prices to protect the interest of society who has to receive price at least in which they can get sufficient amount of goods and services which they are needed . like medical facility.. it is regulated by government to give benefits to society or general public . it maintains the social welfare aspect from government point of view in which proper benefits to society will reach and  give protection to general publc by unfair price hike. .

income elasticity measure that when income increase demand for normal goods ( example Whole wheat, organic pasta noodles ) increases.

second when income increases demand for inferior goods ( Bajara & Maize) decreases because people like to use superior quality of goods than the inferior one.

third when income increase demand for superior good ( ex. smoked salmon and caviar) increaes but it consider the prices also. because people like to purchase luxurry or comfotable goods if they are having income more than sufficient amount to run their budget expenditure.

cross price elasticity measure both substitute and compliment goods.

CPE measures effect of change in price of one goods on the demand of other goods. example substitute Tea and coffee. when price of tea increases then demand for coffee increases it is called substitute effect.

and when price of petrole increase demand for car decreases it is called complement goods. example car and Petrole.