Assignment: Price controls during a pandemic

Question

At the beginning of the pandemic, people were buying essential goods. One of the goods that was most reported in the news was toilet paper. Now imagine, most store owners decided to increase the price of toilet paper to $50. These high prices provoked cries of "price gouging" and calls on the government to impose price controls to prevent gouging. While no one likes to pay a higher price the normal for something, consider what would have happened with a price ceiling. The economic intuition is revealing.

1. Draw a correctly labeled demand and supply graph for the market for toilet paper in the us with an equilibrium price of $20 per pack.
2. During the pandemic, more people were buying toilet paper in fear that it would run out. On the same graph, show how this effects the market for toilet paper. Explain your answer.
3. Now impose a price ceiling of $15 per pack. What would be the impact of the price ceiling on the quantity demanded and the quantity supplied. Illustrate this on the graph and explain.
4. Will the price ceiling create a shortage or excess supply? Explain.
5. Who would benefit from the price ceiling and who would be harmed? Explain your answer. Let the graph guide your thinking.
6. Let's suppose the government now impose a price floor of $15 for a pack of toilet paper. Draw the market for toilet paper with the new price floor of $15 and illustrate the impact on quantity demanded and quantity supplied.
7. Give an example of a price floor and who would benefit from it and who would be harmed. Explain your answer. Remember to reference the source.

All graphs should be neatly drawn. If someone could show me a detailed explanation to each of the questions to this assignment before tonight, I would really appreciate it.

Answer 1

1.Draw a correctly labeled demand and supply graph for the market for toilet paper in the us with an equilibrium price of $20 per pack.

Be sure to label your price and quantity axes and supply and demand curves. We know that equilibrium price is $20 so you can label that on the price axis. We do not know the equilibrium quantity at this price, so I used the label “Qe,” but conventions will vary, so follow the notation that has been used in your course.

2.During the pandemic, more people were buying toilet paper in fear that it would run out. On the same graph, show how this effects the market for toilet paper. Explain your answer.

The fear that toilet paper will run out increases demand for toilet paper today. On the graph this looks like an outward or rightward shift of the demand curve. I have labeled this curve D’, but as always, follow your course’s typical notation. This increase in demand affects both equilibrium price and equilibrium quantity in the market. We do not know exactly what these quantities will be, so I label them as Pe’ and Qe.’ What we do know, however, is that equilibrium price and quantity both rise (Pe’>Pe and Qe’>Qe).

3.Now impose a price ceiling of $15 per pack. What would be the impact of the price ceiling on the quantity demanded and the quantity supplied. Illustrate this on the graph and explain.

4. Will the price ceiling create a shortage or excess supply? Explain.

A price ceiling of $15 means that the good cannot be sold at a price greater than $15. When a price ceiling of $15 per pack is imposed (drawn in purple), we can see the quantity that suppliers will be willing to supply at that price by plotting the quantity that corresponds to a price of $15 on the supply curve. This is labeled Qs. Similarly, we can see what demand would be at a price of $15 by seeing what quantity corresponds to $15 on the demand curve (using our most recent demand curve, D’). This is labeled Qd. As the graph shows, the quantity demanded with a price ceiling of $15 will exceed the quantity supplied at that price, so there will be a shortage. The magnitude of the shortage is shown by the purple bracket (the difference between Qd and Qs).

Note: although we do not know the exact price that is Pe’, we know it must be above $20, as shown in the graph. Therefore, we know that a price ceiling below $20 is also going to be below Pe’.

5.Who would benefit from the price ceiling and who would be harmed? Explain your answer. Let the graph guide your thinking.

Because of the shortage, some people will not be able to purchase toilet paper, so these consumers are harmed. Additionally, suppliers are harmed by this lower price at which they are not willing to sell as much (you might also discuss surplus here if your class has covered that). The people who are helped are the select few consumers who are able to buy the toilet paper at this lower price (even with the shortage SOME consumers will still be able to make a purchase).

6.Let's suppose the government now impose a price floor of $15 for a pack of toilet paper. Draw the market for toilet paper with the new price floor of $15 and illustrate the impact on quantity demanded and quantity supplied.

A price floor of $15 means the good cannot be sold at a price of less than $15. I'm going to leave this to you to draw the floor similarly to the way you would draw the ceiling. The image will be similar but the interpretation different. Ask yourself whether the price floor has any impact if people want to buy and sell the good at a price greater than $15 anyway.

7.Give an example of a price floor and who would benefit from it and who would be harmed. Explain your answer. Remember to reference the source.

You can look up a number of examples here. The farming industry will likely have some. When a price floor is set above equilibrium price (unlike the example in part 6), then you will have a surplus. Farmers who sell their product at the higher price might benefit, but those left with crop they can't sell at the high price (the surplus) may be harmed. Consumers who now have to pay a higher price or forgo consumption of the good because the price is too high for them are also harmed by this.

Let me know if you have any follow up questions!