Engaging Activity

Name: Elumacas, Rian Jade O.

Parala, Crystel Joy B.

Section: 1BSA 1-A

Engaging Activity #1

Group Activity

A. Identify an unconsummated wealth-creating transaction (or a wealth-destroying

one) created by some tax, subsidy, price control, or other government policy, and
then figure out how to profitably consummate it (or deter it). Estimate how
much profit you would earn by consummating (or deterring) it.

Price control is a limitation to the freedom of the market to set prices by

itself. A wealth destroying transaction created by price control is price ceiling in a
product. Price ceiling is the mandated maximum or the highest price at company can
charge into a product or service to make it more available and affordable for the
consumers. It can be set to prevent companies from setting higher prices for equal
purposes.
For example, if many consumers wanted to buy a certain product or services,
and the demand begins to exceed the supply of a product or services. In that case, it
will cause a shortage and as we all know, shortages tend to drive up the price that
the suppliers taken advantage of. As a result, the government called for immediate
action to prevent the rising cost of this product or services, but if the price ceiling
were fixed below the market price, supply will no longer meet demand since
suppliers are less motivated to continue producing and selling the goods or services.
Suppose in the same example, a rental market costing P4000/month. The
government aim to decrease the rent to make it affordable for renters and place a
binding price ceiling of 2500/month. This means that landlords cannot charge more
than P2500/month. Before, 500 homes were rented and there is now a housing
shortage. And at the lower price of P2500/month, quantity supplied is only 400
housing units with a quantity demanded of 600 units. This means that, 200 renters
can’t find rental homes and still have shortages. When price decreases, supply
decreases as well while the demand increases. In this case, many has stop and
become less interested in renting home since the market is restrained by lower
value.
 To find out the impact of government’s price ceiling and the profit from
rental homes. We must calculate the income before and after the policy.
Before Policy:
Rental homes: P4000/month
Quantity supplied: 500 housing units
P4000 x 500 = P2,000,000
Rental homes earn about P2,000,000/month

After Policy:
Rental homes: P2500/month
Quantity supplied: 400 housing units
P2500 x 400 = P1,000,000
Rental homes earn about P1,000,000/month

The result shows that there was a loss of profit after implementing the policy.
Before, they earned P2,000,000/month. After the policy, they only earn P1,000,000/month.
Consequently, with the price ceiling, the rental homes loss P1,000,000/month of income.

B. Starbucks is hoping to make use of its excess restaurant capacity in the evenings
by experimenting with selling beer and wine. It speculates that the only additional
costs are hiring more of the same sort of workers to cover the additional hours and
costs of the new line of beverages. What hidden costs might emerge?

Hidden costs are costs that although affecting profitability are not recognized or
only implied. Expenses that may arise are the costs of purchasing new equipment, supplies,
and any other essential bar items. Added to the hidden costs, Starbucks also have to offer
training for the workers for them to learn how to serve wine and beer. Lastly the
advertisement expenses, they need to plan for their marketing strategy in selling beer and
wine just like how they market coffee in their shop; telling customers that coffee isn't the
only thing available at their store.