2. GROUP NO -1
Submitted by :
NAMES:-
AKSHITA BINJOLA 11717703821
DISHA YADAV 36417703821
MEGHA 11017703821
SHIPRA 12617703821
Submitted To :
SUBJECT :
ECONOMICS-1
SEMESTER : 3RD – C
COURSE : BA.LLB

3. APPLICATION OF DEMAND AND
SUPPLY
 CEILINGS
 FLOOR
 TAX

4. Supply, Demand and Government Policies
In a free, unregulated market system, market forces establish equilibrium prices
and exchange quantities.
While equilibrium conditions may be efficient, it may be true that not everyone
is satisfied.
One of the roles of economists is to use their theories to assist in the
development of policies.

5. Buyers always want lower prices, while sellers want higher prices. Thus,
interests of these two groups conflict.
 Controls on prices are usually enacted when policymakers believe the market
price is unfair to buyers or sellers.
For this government creates price ceilings and price floors.

6. Price Ceilings & Price Floors
 Price Ceilings
o A legally established
maximum price at
which a good can be
sold.  Price Floors
o Price Floor A legally
established minimum
price at which a good
can be sold.

7. Price Ceilings
Price ceiling is the maximum price fixes by Govt. on essential goods in case
Equilibrium price is too high for The Common People.
Some of the sellers illegally try to sell at
higher price than fixed price .
This Results in Black Marketing.
Since this price is less than Equilibrium
price so some of the sellers are not willing
to sell their output .
This Results in Hoarding.
To make these goods available to poors .
Govt. can use Rationing.

8. Explanation of price ceiling with the help of example
• Let’s take example of mustard oil to understand the concept of price ceiling.
 At point op=Present price Rs.200/-
 E=equilibrium op= equilibrium price.
 At point op1=Maximum price set by Govt.
Rs.100/-
 at this price demand >supply , Situation of excess
demand.
 Illegally sells/produce at price Rs.150/- (Black
Markting)
 Seller’s Tactics –to increase his profit.
1. Black Marketing.
2. Cheap Quality.
Limitations of
price ceiling

9. Practical Example of a Price Ceiling
 In equilibrium, the price of rent is $1,000 with a quantity of 100. Due to the extremely high
demand for rental housing, the government decided to regulate the situation by imposing a price
ceiling of $900.
 At the ceiling price of $900, quantity demanded is 110 while quantity supplied is 90. The price
demanded at the quantity of 90 is $1,100. Determine the deadweight loss created by the price
ceiling and the quantity shortage.
 Deadweight loss created is illustrated by
the triangle above and is calculated as 0.5 x
(($1,100 – $900) x (100 – 90)) = 1,000 in
deadweight loss created.
 Quantity shortage is the difference
between quantity demanded and quantity
supplied and is calculated as 110 – 90 = 20
quantity shortage.

10.  Gains/Losses is the change in surplus for
consumers and producers and is illustrated
graphically below. Both consumers and
producers lose: it is illustrated by the
deadweight loss (LC – loss to consumers; LP
– loss to producers).
 However, consumers face a net gain because
the price ceiling has caused a shift in
producer surplus to consumer surplus
(illustrated by the green rectangle).
Therefore, in our example:
 Consumers gain: Consumers lose LC but
gain the green rectangle.
 Producers lose: Producers lose LP and also
lose the green rectangle.

11. How Price Ceilings Affect Market
Outcomes:
 When govt. imposes price ceiling,
following two outcomes are possible:
1. If price is set above the equilibrium
price, price ceiling is not binding .
 Price ceiling has no effect on the price
or quantity sold .

12. • Therefore, when government imposes a binding price ceiling on a market, shortage of the
good arises.
2. If price is set below the equilibrium
price, price ceiling is a binding
constraint.
 The forces of demand and supply
move price towards equilibrium
price.
 But when market price hits the
ceiling, it can rise no further.
 Thus, market price equals price
ceiling.
 At this price, quantity demanded
exceeds quantity supplied, creating
shortage for the good.

13. Minimum price policy:- Price Floor
It is the minimum price fixed by the Govt. to help Producers, mainly farmers at the
time of Bumper Crop .
Govt. purchases this Surplus
from producers.
It will results in Buffer Stock.

14. How Price Floors Affect
Market Outcomes:
 When govt. imposes price floor,
following two outcomes are possible:
1. If price is set below the equilibrium
price, price floor is not binding .
 Price floor has no effect on the price
or quantity sold .

15. 2. If price is set above the
equilibrium price, price floor is a
binding constraint.
The forces of demand and
supply move price towards
equilibrium price.
 But when market price hits the
floor, it can fall no further.
 Thus, market price equals
price floor.
At this price, quantity supplied
exceeds quantity demanded,
causing surplus for the good.
Govt. purchase this surplus
from producers. It will results
in buffer stock.

16. The Minimum Wage
 An important example of a
price floor is the minimum
wage.
Minimum wage laws dictate the
lowest price possible for labor
that any employer may pay.
A free labor market
A labor market with a
minimum wage

17. PROS & CONS
 Price Ceiling
Maximum prices set by government for a
particular good/service.
Pros
 Affordability
 Addresses to a wider section of the
society
Cons
• Lowers the Supply
• Creates shortage
• Emergence of Black Markets
 Price Floors
Minimum prices set by government for a
particular good or labor.
 Pros
 Higher Income for Producers
 Higher Income for Labor
Cons
 Higher Prices for consumers
 Encourage oversupply and
 In effeciency Higher Unemployment

18. Governments use taxes to raise revenue for public projects, such as for: –
Roads
 Schools
 National defense
Taxes affect market activity.
When a good is taxed, the quantity sold is smaller.

19. What are some potential impacts of taxes?
Taxes discourage market activity.
When a good is taxed, the quantity sold is smaller.
Buyers and sellers share the tax burden.
Tax incidence is the study of who bears the burden of a tax.
Taxes result in a change in market equilibrium.
Buyers pay more and sellers receive less, regardless of whom the tax is levied
on.

20. SUMMARY
 Price controls include price ceilings and price floors.
 A price ceiling is a legal maximum on the price of a good or service. An example are crude
oil and rental housing.
 A price floor is a legal minimum on the price of a good or a service. An example is the
minimum wage.
 Taxes are used to raise revenue for public purposes.
 When the government levies a tax on a good, the equilibrium quantity of the good falls.
 A tax on a good places a wedge between the price paid by buyers and the price received by
sellers.

21. The incidence of a tax refers to who bears the burden of a tax.
 The incidence of a tax does not depend on whether the tax is levied on buyers
or sellers.
The incidence of the tax depends on the price elasticities of supply and demand.