Download • Price controls : a legal maximum on the price

• Price controls
– Price ceiling: a legal maximum on the price
of a good or service Example: rent control
– Price floor: a legal minimum on the price of
a good or service Example: minimum wage
SUPPLY, DEMAND, AND
GOVERNMENT POLICIES
1
EXAMPLE 1: The Market for Apartments
P
Rental
price of
apts
S
$800
Eq’m w/o
price controls
D
300
Q
Quantity of
apartments
SUPPLY, DEMAND, AND
GOVERNMENT POLICIES
2
How Price Ceilings Affect Market Outcomes
A price ceiling
above the
eq’m price is
not binding –
has no effect
on the market
outcome.
P
S
Price
ceiling
$1000
$800
D
300
SUPPLY, DEMAND, AND
GOVERNMENT POLICIES
3
Q
How Price Ceilings Affect Market Outcomes
The eq’m price
($800) is above
the ceiling and
therefore illegal.
The ceiling
is a binding
constraint
on the price,
causes a
shortage.
SUPPLY, DEMAND, AND
GOVERNMENT POLICIES
P
S
$800
Price
ceiling
$500
shortage
D
250
4
400
Q
EXAMPLE 2: The Market for Unskilled Labor
Wage
paid to
unskilled
workers
W
S
$4
Eq’m w/o
price controls
D
500
Quantity of
unskilled workers
SUPPLY, DEMAND, AND
GOVERNMENT POLICIES
5
L
How Price Floors Affect Market Outcomes
A price floor
below the
eq’m price is
not binding –
has no effect
on the market
outcome.
W
S
$4
Price
floor
$3
D
500
SUPPLY, DEMAND, AND
GOVERNMENT POLICIES
6
L
How Price Floors Affect Market Outcomes
The eq’m wage ($4) is
below the floor and
therefore
illegal.
The floor
is a binding constraint
on the wage,
causes a
surplus (i.e.,
unemployment).
SUPPLY, DEMAND, AND
GOVERNMENT POLICIES
labor
surplus
W
S
Price
floor
$5
$4
D
400
7
550
L
The Minimum Wage
Min wage laws
do not affect
highly skilled
workers.
They do affect
teen workers.
unemployment S
W
$5
$4
Studies:
A 10% increase
in the min wage
raises teen
unemployment
by 1-3%.
SUPPLY, DEMAND, AND
GOVERNMENT POLICIES
Min.
wage
D
400
8
550
L
ACTIVE LEARNING 1
Price controls
P
140
Determine
effects of:
A. $90 price
ceiling
130
The market for
hotel rooms
S
120
110
100
90
B. $90 price
floor
80
C. $120 price
floor
60
D
70
50
40
0
Q
50 60 70 80 90 100 110 120 130
9
ACTIVE LEARNING 1
A. $90 price ceiling
The price falls
to $90.
P
140
The market for
hotel rooms
130
S
120
Buyers
demand
120 rooms,
sellers supply
90, leaving a
shortage.
110
100
90
80
Price ceiling
shortage = 30
D
70
60
50
40
0
Q
50 60 70 80 90 100 110 120 130
10
ACTIVE LEARNING 1
B. $90 price floor
Eq’m price is
above the floor,
so floor is not
binding.
P = $100,
Q = 100 rooms.
P
140
The market for
hotel rooms
130
S
120
110
100
90
80
Price floor
D
70
60
50
40
0
Q
50 60 70 80 90 100 110 120 130
11
ACTIVE LEARNING 1
C. $120 price floor
The price
rises to $120.
Buyers
demand
60 rooms,
sellers supply
120, causing a
surplus.
P
140
130
120
110
The market for
hotel rooms
surplus = 60
S
Price floor
100
90
80
D
70
60
50
40
0
Q
50 60 70 80 90 100 110 120 130
12
Evaluating Price Controls
• Recall one of the Ten Principles from Chapter 1:
Markets are usually a good way
to organize economic activity.
 Prices are the signals that guide the allocation of
society’s resources. This allocation is altered when
policymakers restrict prices.
 Price controls often intended to help the poor,
but often hurt more than help.
SUPPLY, DEMAND, AND
GOVERNMENT POLICIES
13