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Principle of Economics

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Q2: a) Using the graph shown, analyze the effect a $300 price ceiling would have on the market for ten-speed bicycles. Would this be a binding price ceiling? b) Using the graph shown, analyze the effect a $700 price floor would have on this market for ten-speed bicycles. Would this be a binding price floor? c) Why would policymakers choose to impose a price ceiling or price floor?

A price ceiling upon ten-speeds would increase demand for bicycles, given how inexpensive this price would be for many high-end bicycles. This mandatory price cut would also decrease the incentive to produce bicycles. It would strangle the luxury bicycle market, as producing ten-speeds of a certain level of quality vastly exceed that of $300. It would have less of an effect on toy store quality bicycles; although to some extent it would limit bargain bicycle companies ability to compete on price, as mid-level priced cycles would be forced to hover closer to the $300 mark than before. But in general, Ii the price ceiling is above the market price, then there is no direct effect, and is not considered a binding or impositional price floor (Price ceilings and floors, Investopedia, 2009)