Price Ceiling and Price Floor

With the cheaper products that Wal-mart has been providing to the market, they have been able to give more than the “optimal” level of benefits to the consumers. In other words, there is a surplus on the societal welfare. Monopolists usually create deadweight losses in the market because they charge higher price. But since Wal-mart is charging cheaper prices, it does not create losses in welfare but rather improves societal welfare. Like for instance, if the consumer derives 10units of satisfaction from paying $3 for a pillow, then, Wal-mart could improve the said level of satisfaction of customer to 15 units by charging $2.5 for a pillow.

Price ceiling/floor is being imposed by the government to various businesses in order to protect the interest of the consumer group from abusing producers especially the monopolizing companies. This is to prevent the monopolists from charging high prices on the consumers or to prevent them from performing cut throat competition in order to perish competitors especially the new entrants. As for Wal-mart, the first problem for a monopolist is not included in this case since they are offering low priced goods.

The reason why the government imposed price floor on Wal-mart is for them to prevent the Giant retailer from performing cut throat competition. Cut throat competition is being done by some companies through setting their prices lower than the usual level in order to attract more customers to buy their goods and left only a small number of customers to the new entrants. This lowering of prices will continue until the new entrant business will shut down due to high costs, low profitability and sales return. The price floor will allow new entrants to have enough market and to compete with Wal-mart.

Marginal/Average/Variable/Fixed/Total Costs Another factor that helps Wal-mart to have the capacity to offer lower price goods is their bargaining power with their suppliers. It is said that Wal-mart serves as a tool in correcting the ‘imperfectly competitive companies’ by bargaining to them until Wal-mart is able to move this producers down to the demand curve. Without Wal-mart, prices of the goods that they are selling would be higher as compared to when there is Wal-mart in the market that ‘regulates’ the producer group.

On the other hand, the marginal costs of the operation of Wal-mart in the short run would not be that much as compared to the long run since in the long run the more goods that we sell, the less operational costs that we incur in the operation. As for the average costs, Wal-mart is having an increasing average costs due to the operational expansion that they have implemented from the previous years. The said expansion increased the number of goods that Wal-mart is selling and the operational costs. Moreover, average costs can also be computed by adding the sum of the average variable costs and the average fixed costs (Piana 1).

Lately Wal-mart buys new machineries for their expansion, then their average fixed costs increases. Alongside of the buying of new machineries, Wal-mart also increased the number of the goods that they are selling, then, their Average variable cost also increases. Adding both of the costs of expansion would give us the average costs of Wal-mart. In the short run, there may be average fixed costs that cannot be put into implementation due to constraints in the budget. But in the long run, there is a great possibility that almost all of the machineries that Wal-mart wanted to buy would be possible.