Research

Name

Institution

Research

Prices of highly advertised brands

The frequently advertised commodities had become popular which made them leading brands and thus more expensive than other brands. Also, advertising expenses are normally exorbitant and thus the products must be sold at a higher price to reduce the effects of advertising expenses on the profit margins.

Price floor

Price floors are created when commodity prices are artificial maintained above the market equilibrium prices and are prevent from falling (Baumol & Blinder, 2010). Examples of price floors are numerous in agriculture. With the development of new technologies and farming method, agricultural production has always been on the increase. Increase in commodities consequently encouraged drop in the prices of the commodities and as a result farmer could not even raise their initial invest. To protect farmers and discourage them from stopping production of food, the government set price floor to ensure that farmers can still sell their products at profitable margins.

Price Ceiling

As Mankiw (2011) notes, a price ceiling is created when prices are artificially maintained under the equilibrium price and prevented from rising. Examples of price ceilings occur in many cities through legal rent control mechanisms. This involves the government of the local authorities stipulating the maximum amount of money that can be charged by as rent. Although the amount may be allowed to rise yearly due to inflation, the maximum payable rent remains below the market equilibrium value.

Impacts of a price floor

Price floor leads to a surplus of commodities, for instance, in agriculture; it leads to a surplus of agricultural products in the market. The government and producers have to find a way of storing their surplus products (Baumol & Blinder, 2010).

Impacts of a price ceiling

Price ceilings lead to shortages in commodity supply, since very few landlords will be willing to provide facilities at a price lower than the equilibrium rent. The shortages lead to rationing challenging, since, somehow, some buyer will have to get the commodities while some will miss out. The most common method of allocation of the limited facilities/commodities is first come, first served. There will be hundreds of tenant vying for a single apartment. Landlords/sellers may choose specific tenants/buyers (Mankiw, 2011).

Price ceiling benefit buyers at the expense of sellers. Sellers shy from selling their product at lower prices and encourage black and grey markets.

Price floor achievement of its objectives

Price floor serve to encourage continued production of commodities by protecting producers such as farmers from low prices that would lead to losses. Such losses would discourage the farmer from farming (Baumol & Blinder, 2010). However, since the assurance of a stable price encourages continued production; price floors in agriculture normally achieve their objectives.

Price Ceiling Achievement of its objective

Price ceiling help prevent consumers from exploitation by producers or suppliers. However, the shortages caused by this legal approach normally undermine the achievement realized through stable prices (Mankiw, 2011).

Reference

Baumol, W. J., & Blinder, A. S. (2010). Macroeconomics: Principles and Policy. New York: Cengage Learning.

Mankiw, N. G. (2011). Principles of Macroeconomics. New York: Cengage Learning.