In the late eighteenth century, the price of bread in New...

In the late eighteenth century, the price of bread in New York City was controlled, set at a predetermined price above the market price. a. Draw a diagram showing the effect of the policy. Did the policy act as a price ceiling or a price floor? What kinds of inefficiencies were likely to have arisen when the controlled price of bread was above the market price? Explain in detail. One year during this period, a poor wheat harvest caused a leftward shift in the supply of bread and therefore an increase in its market price. New York bakers found that the controlled price of bread in New York was below the market price. c. Draw a diagram showing the effect of the price control on the market for bread during this one-year period. Did the policy act as a price ceiling or a price floor? d. What kinds of inefficiencies do you think occurred during this period? Explain in detail.

In the late eighteenth century, the price of bread in New York City was controlled, set at a predetermined price above the market price.
a. Draw a diagram showing the effect of the policy. Did the policy act as a price ceiling or a price floor?
What kinds of inefficiencies were likely to have arisen when the controlled price of bread was above the market price? Explain in detail. One year during this period, a poor wheat harvest caused a leftward shift in the supply of bread and therefore an increase in its market price. New York bakers found that the controlled price of bread in New York was below the market price.
c. Draw a diagram showing the effect of the price control on the market for bread during this one-year period. Did the policy act as a price ceiling or a price floor?
d. What kinds of inefficiencies do you think occurred during this period? Explain in detail.

Key Concepts

Deadweight Loss

Deadweight loss refers to the loss of economic efficiency that occurs when the equilibrium for a good or service is not achieved, often because of market distortions like price ceilings or floors. This loss represents the net benefits that are not realized by consumers or producers, as the price controls prevent mutually beneficial trades from occurring.

Market Equilibrium

Market equilibrium is the point at which the quantity of a product supplied equals the quantity demanded at a particular price. Price controls disrupt this balance by either setting prices too high or too low, leading to inefficiencies such as surpluses or shortages, which in turn create deadweight loss in the market.

Supply and Demand Shifts

Shifts in the supply and demand curves represent changes in market conditions independent of price control policies, influenced by factors like production costs and external events (e.g., a poor harvest). Such shifts can alter the equilibrium price and quantity, and when combined with price controls, can exacerbate market inefficiencies.

Price Floor

A price floor is a minimum allowable price set by the government, which is typically above the market equilibrium price. This control prevents prices from falling below a certain level and can lead to excess supply, as quantity supplied exceeds quantity demanded, resulting in inefficiencies like wasted resources or surpluses.

Price Controls

Price controls are government-imposed limits on the prices that can be charged for goods and services in a market. They are implemented to protect consumers or producers but can lead to market distortions when prices are set above or below the natural equilibrium determined by supply and demand.

Price Ceiling

A price ceiling is a maximum allowable price set by the government, usually below the market equilibrium. This control is intended to make goods affordable for consumers, but it often results in shortages because the quantity demanded exceeds the quantity supplied, leading to inefficiencies such as rationing and reduced product quality.

Transcript

00:01 In the late 18th century, the price of red in new york city was controlled and it was set at a predetermined price above the market level.

00:08 So the first question wants us to draw a diagram showing the effect of the policy and that the policy act as a price ceiling or as a price flow.

00:19 So the diagram should look like, the diagram showing the effect of policy should look like this.

00:34 Pg over here, the quantity demanded over here, quantity supplied over.

00:40 Here and then so this point is where the goals sets p the government sets the government sets price so and this so this meets somewhere right here and this point is the supply and then the other one meets and then this comes right here so at the point where this intersect is the demand and therefore this side is a surplus right and this is the demand this is a supply so therefore we can see that the pg is greater than the p the government set price which is this because we can see this is greater than this so it is price flow so now moving on to the next question what kinds of inefficiency were likely to have arising for when the controlled price of bread was above the market price and explaining details so since at pg the quantity demanded which is qd is less than the quantity supplied if you go back there the pg the quantity demanded which is this is less than quantity supplied which is this so that means that the the quantity is greater than the quantity is less than i'm sorry that means that the quantity supplied is greater than the quantity demand it because if quantity amount is less than quantity supply then quantity supply is greater quantity demanded so this means that there's a surplus in the market and this equals the qs minus the qd the quantity supplied minus the quantity demanded and that's where the surplus is so moving on to the next question one year during this period the poor with a adverse cost a left -word shift in the supply of bread and therefore an increase in the market price...

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