Final answer:
The term for the expected cost of a loaf of bread is the reference price. Equilibrium price and quantity are found where demand and supply intersect, and a price ceiling can create a shortage by setting a price below the equilibrium, leading to excess demand. Prices can additionally serve as a signal of quality to consumers.
Step-by-step explanation:
The term you are referring to when you feel that a loaf of bread should be less than $2.00 is your reference price. This is based on your past experience and expectations of what a loaf of bread should cost.
In economics, the equilibrium price and equilibrium quantity are determined where the demand and supply curves intersect, before any price ceilings are introduced. When a price ceiling is set below the equilibrium price, it causes a shortage since the quantity demanded exceeds the quantity supplied. This excess demand or shortage can be calculated by subtracting the quantity supplied from the quantity demanded at the price ceiling levels.
Example Calculation for Excess Demand or Shortage:
- If the price ceiling is set at $2.40: Excess Demand = Quantity Demanded at $2.40 - Quantity Supplied at $2.40
- If the price ceiling is set at $2.00: Excess Demand = Quantity Demanded at $2.00 - Quantity Supplied at $2.00
- If the price ceiling is set at $3.60: Excess Demand = Quantity Demanded at $3.60 - Quantity Supplied at $3.60
Prices also can act as a signal of quality to consumers, especially in situations of imperfect information. When consumers encounter a high-priced item, they might infer that its quality is superior to a similar, lower-priced item.