Overview
This lecture covers the effects of government price controls, specifically price ceilings and price floors, using demand and supply models to illustrate market impacts, shortages, and surpluses.
Price Controls: Introduction
- Price controls are laws set by the government to regulate market prices.
- Two main types exist: price ceilings (maximum prices) and price floors (minimum prices).
- Price controls often address public concern over prices for essential goods or services.
Price Ceilings
- A price ceiling is a legal maximum that can be charged for a good or service.
- Governments use price ceilings to keep necessary goods affordable during shortages or when demand spikes.
- Common example: rent control laws in cities to limit rent increases.
- If a price ceiling is below the equilibrium price, quantity demanded exceeds quantity supplied, leading to shortages.
- Shortages from price ceilings can reduce product quality, as sellers have less incentive to maintain or improve goods.
- Some intended beneficiaries may miss out if there aren't enough goods available at the capped price.
Price Floors
- A price floor is a legal minimum that must be paid for a good or service.
- The best-known example is the minimum wage, meant to ensure basic living standards for workers.
- Price floors are also used as price supports in agriculture to prevent market prices from falling too low and destabilizing farmers’ income.
- With a price floor above equilibrium, quantity supplied exceeds quantity demanded, creating a surplus.
- The government may purchase excess supply to stabilize prices, but this comes at a cost to taxpayers and consumers.
Key Terms & Definitions
- Price Controls — Government laws that set or limit the prices in a market.
- Price Ceiling — The highest legal price for a good or service.
- Price Floor — The lowest legal price for a good or service.
- Shortage — A situation where quantity demanded exceeds quantity supplied.
- Surplus — A situation where quantity supplied exceeds quantity demanded.
- Equilibrium — The market point where quantity supplied equals quantity demanded.
Action Items / Next Steps
- Review demand and supply graphs illustrating price ceilings (shortages) and price floors (surpluses).
- Prepare examples of price controls from current events or history for discussion.