Download PowerPoint: Price Controls

Government
Imposed Price
Controls
The government should make gas cheaper and
minimum wage higher!
Most prices in the United
States are set by the market
Supply and demand determine
price
Decision making is decentralized—
they are made by individuals and
businesses
In Competitive Markets:
Buyers compete with other buyers
Sellers compete with other sellers
Everyone who is willing and able to
buy at the market price gets the
product
Everyone who is willing and able to
sell at that price can sell it
Perfect Right?
Not to everyone
Price Control
Sometimes lobbyists for producers can
convince government officials that market
prices are too low
Is Minimum Wage Too Low?
This is a generic budget that
McDonald’s designed for its adult
workers.
Write down your thoughts about
living on this budget. Could you
do it? Is it missing anything that
you need?
PROBLEMS?
Assumes one full-time and one parttime job!
What about food?
What about health insurance?
(typically $200)
What about gasoline? (typically
$250)
What about clothes?
What about childcare?
What if Prices Are Too Low?
A price floor is a legally enforced minimum
price for a product
Price floors are set above the equilibrium
price
Price Floor: Minimum Wage
Graph this:
The equilibrium price of wages is
$7.25 an hour
The government raises minimum
wage to $10.10 an hour
What happens?
Price Floor
What market condition does a
price floor create?
Surplus
Price Control
Sometimes lobbyists for consumers can
convince government officials that market
prices are too high
When Prices are Too High
A price ceiling is the legally enforced
maximum price that can be charged for a
good or a service
Price ceilings are below the equilibrium price
Price Ceiling: Gas
Graph this:
Equilibrium quantity of gas 10
million gallons per week
Equilibrium price is $2.50
The price ceiling for gas is
$1.50
What is the result?
Price Ceiling Cont.
What market condition does a price
ceiling create?
Shortage
Why? Because the price is set below the
equilibrium, thus there is more demand
and less supply
Price Ceilings
There are not many examples of
price ceilings in the U.S. today
Rent control is used in some major cities
to keep rent low
Can be imposed during crises; wars,
harvest failures, and natural disasters
to stop sky-rocketing prices
“We economists don't know much, but we do
know how to create a shortage. If you want to
create a shortage of tomatoes, for example, just
pass a law that retailers can't sell tomatoes for
more than two cents per pound. Instantly you'll
have a tomato shortage. It's the same with oil or
gas.”
 Milton Friedman
If They Create Shortages and
Surpluses, Then Why Do They
Become Laws?
They sound like a good idea to the
public
Politicians want to keep their
constituents happy
Special interest groups push for
them