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Applied Economics Senior High School Government Intervention in Market Price: Prince Ceiling Quarter 3

This document discusses government intervention in market prices through the use of price ceilings. It provides an example of price ceilings on rent in the Philippines, where the maximum monthly rent is set at 10,000 pesos for Metro Manila. The document uses a supply and demand graph to show how price ceilings can result in shortages. When the price ceiling is set below the equilibrium price, as in the rental housing example, it creates a shortage situation where quantity demanded exceeds quantity supplied.

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LOMIBAO, JC HUBBER P.
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48 views

Applied Economics Senior High School Government Intervention in Market Price: Prince Ceiling Quarter 3

This document discusses government intervention in market prices through the use of price ceilings. It provides an example of price ceilings on rent in the Philippines, where the maximum monthly rent is set at 10,000 pesos for Metro Manila. The document uses a supply and demand graph to show how price ceilings can result in shortages. When the price ceiling is set below the equilibrium price, as in the rental housing example, it creates a shortage situation where quantity demanded exceeds quantity supplied.

Uploaded by

LOMIBAO, JC HUBBER P.
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Applied

Economics

SENIOR

HIGH

SCHOOL

Government Intervention
In
Market Price: Prince Ceiling

MODULE 10
Quarter 3

LESSON
Previously, we discussed the causes of disequilibrium which are the market

shortage and surplus. It happens because of the interaction of consumers and

producers about the prices, and the existence of scarcity. Since our country runs a

mixed economy, the government has a big role in attaining economic goals. Price

stability is one of the goals that the government must achieve. When prices are

stable in the market, both consumers and businesses enjoy their economic

security. Government intervention is needed to ensure that market prices are

stable. This module will give you a better understanding of the roles of the

government in market prices specifically in price ceiling.

Price Controls

The supply and demand model shows how people and firms will react to the

incentives that laws provide to control prices, in ways that will often lead to

undesirable consequences. Many Filipinos are complaining about the high prices of

commodities. Of course, they can’t afford to buy their needs at higher prices. With
this, the government intervene in the market prices to augment the social benefit of

the people through price controls. Price controls are government-mandated legal

minimum or maximum prices set for specified goods, most necessities. It is

considered as a government policy to stabilize the market prices for the benefit of

consumers. However, there are consequences of imposing these price controls. One

of the price controls that the government may adopt is the price ceiling.

Price Ceiling

Price ceiling is the maximum price that sellers need to impose on a certain

product. It is located below the equilibrium price as shown in figure 1.

It shows that the market demand and supply of sandwiches with an

equilibrium price of ₱20. Let say the government forced to have a price ceiling in

snacks and related products at ₱15, hence it is illegal to put higher prices above

₱15. With a price ceiling of ₱15, quantity demanded increases from 60 to 80


sandwiches while quantity supplied drops from 60 to 40 sandwiches. What will

happen eventually? This will cause shortage since the suppliers are discouraged to

produce more sandwiches with a lower price. Meanwhile, the consumers are willing

to purchase more sandwiches at a lower price.

In the Philippines, we have a government policy on rent control under

Republic Act No. 9653. The act focuses on the regulation of rent of certain

residential units. Section 5 of the article states that:

“All residential units in the National Capital Region and other highly urbanized

cities, the total monthly rent for each of which ranges from One peso (P1.00) to

Ten thousand pesos (P10,000.00) and all residential units in all other areas,

the total monthly rent for each of which ranges from One peso (P1.00) to Five
thousand pesos (P5,000.00)…”

Meaning to say, the government sets the price ceiling on the monthly rent for

residential units in Metro Manila which is at a maximum of ₱10,000 for highly

urbanized areas (business center in Makati, Ortigas, Eastwood, etc.) and ₱5,000 in
other areas. Of course, everyone needs an affordable place to live. Perhaps locallybased businesses
expand, bringing higher incomes and more people into the area.

Changes of this sort can cause a change in the demand for rental housing.

Hypothetical Application of Price Ceiling:

The graph below shows the original supply and demand curves, S and D.

You can see the original equilibrium point, ₱4,000, and 6,000 units.

What do you think will be the effect of greater income or an increase in the

preferences living in Metro Manila? An increase in the preferences living in Metro

Manila would cause an increase in demand, causing the demand curve to shift to

the right from D1 to D2. The new equilibrium point is ₱5,000 and 8,000 units.
Let say, the price ceiling is set at ₱4,000 by the government as shown on the

graph by the horizontal dotted line. What is the new quantity demanded? The new

quantity demanded is the quantity at the point at which the new demand curve

and the price ceiling intersect, in the graph it is at 10,000 units.

With the price ceiling in effect, the quantity supplied remains at the same

6,000 rental units, but the quantity demanded increases to 10,000 rental units. In

other words, the quantity demanded exceeds the quantity supplied, so there is a

shortage of rental housing. This shortage is shown on the graph as the difference

between the two vertical lines (10,000 units - 6,000 units) which is 4,000 units.
In the graphs above, we saw what happens when a price ceiling for the rent

is imposed to keep the price at the original equilibrium of ₱4,000 for a typical

apartment. The horizontal line at the price of ₱4,000 shows the legally fixed

maximum price set. At that price (₱4,000), the quantity supplied remains at the

same 6,000 rental units, but the quantity demanded is 10,000 rental units.

One of the ironies of price ceilings is that while the price ceiling was

intended to help renters, there are fewer apartments rented out under the price

ceiling (6,000 rental units) than would be the case at the market rent of ₱5,000

(8,000 rental units). When a price ceiling is set below the equilibrium price, as in

this example, it is considered a binding price ceiling, thereby resulting in a

shortage.

Price ceilings or suggested retail prices have been proposed for basic

commodities like rice, cooking oil, medicines, and other necessities. Temporary

price ceilings are evident during a state of emergencies and calamities.


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