Class Notes
Price Ceilings & Floors, Price Elasticity of Demand & Supply
 Define Ceilings and Floors: when the ____________________________ intervenes in a market to
prevent the laws of ____________________________ and ____________________________ from
determining ____________________________.
Price Ceilings
 A price ceiling is a legally established ____________________________ price (i.e. the
____________________________ price that can be charged for a particular good or service)
 Governments intend price ceilings to ____________________________ consumers from rapid price
____________________________ or price ____________________________ that could make
necessary ____________________________ (like ____________________________) unattainable
 A price ceiling does not allow the price of a good or service to ____________________________
____________________________ a certain ____________________________
 A price ceiling is always set ____________________________ the ____________________________
price
 Example of a price ceiling:
o ________________________________________________________ - these laws limit the
____________________________ that can be charged (or limit the
____________________________ in ____________________________ from year to year)
 Consequences of Price Ceilings
 Creates ____________________________
 The quantity demanded in the market (which is encouraged by the lower price) exceeds
quantity supplied (which is discouraged by the lower price). Economists call this
outcome a shortage.
 Opens up ____________________________ for an ____________________________ market
 sales which happen at an ____________________________ price (above
____________________________)
Price Floors
 A ____________________________ established ____________________________ price (i.e. the
____________________________ price that can be charged for a particular good or service)
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 Governments enact price floors when they fear that the price might be
____________________________ than they desire it to be.
 A price ____________________________ does not allow the price of a good or service to drop
____________________________ a certain price
 A price floor is always set ____________________________ the ____________________________
price
 Examples
o ________________________________________________________
o ________________________________________________________
 Consequences of Price Floors
o ____________________________
 The quantity ____________________________ in the market (which is encouraged by
the ____________________________ price) ____________________________ quantity
____________________________ (which is discouraged by the higher price).
o The surplus creates a situation in which some producers won't be able to
____________________________ their goods or services (an insufficient quantity is demanded)
 With farm price supports, the government has often stepped in to purchase the surplus
products.
 With minimum wage laws, a basic concern is that although the minimum wage will help
those who continue to keep their job, it will injure those who lose a job (or are not hired
or are hired for fewer hours) as a result of the minimum wage.
Price Elasticity of Demand
 The way of measuring how much quantity ____________________________ will change in response to
a change in ____________________________.
 Three types of Elasticity
1) ____________________________: when a price changes causes a relatively
____________________________ change in quantity demanded
2) ____________________________ Elastic:
when a price changes causes a
____________________________ change in quantity demanded
3) ____________________________: when a price changes causes a relatively
____________________________ change in quantity demanded
 Determinants of Elasticity
 Availability of ____________________________ items [ex. Coco Puffs]
 ____________________________ vs. ____________________________ [ex. Insulin]
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

Price as a ____________________________ of ____________________________ [ex. 20%
increase in price of trash bags and 20% increase in price of a luxury sports car]
____________________________ [ex. rise in gas prices over the short term vs. rise in gas prices
over the longer term]
 Formula: the percentage change in quantity demanded divided by the percentage change in price
% change in quantity demanded
% change in price
 How do you determine % change in quantity demanded (what’s the formula?)?
ΔQ
(Q + Q₁) / 2
 How do you determine % change in price (what’s the formula?)?
ΔP
(P + P₁) / 2
Δ = change
Q = quantity demanded
P = price
 What’s the advantage to measuring elasticities as a percentage? the specific units being used to measure
the quantity and the price don't matter--only the percentages.
Don’t believe the myth of vertical demand. You may (incorrectly) think that for some goods a change in price
will not influence the quantity demanded. Don’t confuse “no change” with a percentage change in the quantity
demanded less than the percentage change in price. An example of bad logic: "higher gasoline prices will not
discourage gas consumption." Even in the short run, higher gasoline prices will discourage gas consumption
even if the percentage decrease in the quantity demanded is less than the percentage increase in price. In the
long run, consumers can find creative substitutes for gas such as more fuel-efficient cars or living closer to work,
and the percentage decrease in the quantity demanded will be even greater.
Demand for luxury items is more elastic (sensitive to changes in price) than necessities. For example, if the price
of chocolate candy decreases, the demand is likely to increase. People will want to treat themselves. Of course,
demand elasticity also depends on the tastes of individuals. If you don’t like chocolate, you won’t buy any, no
matter what the price. Your demand for chocolate candy would, therefore, be inelastic.
If the price of bread increases slightly, the demand will not increase much, if at all. Most people consider bread
a necessity, so they will give up other things in order to afford it. If the price of bread decreases, demand will
not change much either, because bread is perishable and there is only so much of it you can eat in the short time
that it remains fresh. Because the demand for bread is not very sensitive to price changes, the market for bread
is an example of demand inelasticity. Meaning that, within limits, people will buy about the same amount of
bread no matter what the price. However, remember that even necessities with inelastic demand curves (like
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bread) can become more elastic if there are many firms competing to sell them. One firm's product becomes a
substitute for another firm's product. Competition increases elasticity of demand.
Price elasticity of demand is the response of the quantity demanded to a change in price. A large response is
called elastic demand while a small response is called inelastic demand.
 Why is knowing the elasticity of demand useful? It’s useful when determining the effects of price changes
on quantity demanded. A firm has more power over price changes if demand is inelastic.
Price Elasticity of Supply
 A measure of the way in which quantity ____________________________ responds to a change in
____________________________
 Three types of Elasticity of Supply
1) ____________________________ Supply:
a change in the price causes a relatively
____________________________ change in quantity supplied
2) ____________________________ Elastic Supply: a change in the prices causes a
____________________________change in the quantity supplied
3) ____________________________ Supply: a change in the price causes a relatively
____________________________ change in quantity supplied
 Determinants of Supply Elasticity
 If a firm can react ____________________________ to higher or lower prices, then supply is
likely to be ____________________________
 If a firm takes ____________________________ to react to a change in price, then supply is likely
to be ____________________________
 How is the Elasticity of Supply DIFFERENT from the Elasticity of Demand?
1) The number of ____________________________ has no bearing on the
____________________________ of ____________________________
2) The
ability
to
____________________________
the
purchase
or
the
____________________________ of ____________________________ consumed have no
relevance to ____________________________ elasticity
3) Only
____________________________
considerations
determine
____________________________ elasticity.
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