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Artificial Barriers
Unit 6.3
Artificial Barriers
– Your book looks at different scenarios at which
there is an artificial barrier that prevents the
market from getting to an equilibrium point.
– These barriers can either fix the prices higher
(Price Floor) or lower than the equilibrium
point (Price Ceiling).
Price ceiling
– A barrier that keeps the price lower than the
equilibrium point is called a price ceiling, as
prices are not allowed to go higher than the
price ceiling.
– An example of a price ceiling is rent control.
The Market for Gasoline with a Price Ceiling
(a) The Price Ceiling on Gasoline Is Not Binding
Price of
Gasoline
Supply, S1
1. Initially,
the price
ceiling
is not
binding . . .
Price ceiling
P1
Demand
0
Q1
Quantity of
Gasoline
The Market for Gasoline with a Price Ceiling
(b) The Price Ceiling on Gasoline Is Binding
Price of
Gasoline
S2
2. . . . but when
supply falls . . .
S1
P2
Price ceiling
3. . . . the price
ceiling becomes
binding . . .
P1
4. . . .
resulting
in a
shortage.
Demand
0
QS
QD Q1
Quantity of
Gasoline
Rent Control in the Short Run and in the Long Run
(a) Rent Control in the Short Run
(supply and demand are inelastic)
Rental
Price of
Apartment
Supply
Controlled rent
Shortage
Demand
0
Quantity of
Apartments
Rent Control in the Short Run and in the Long Run
(b) Rent Control in the Long Run
(supply and demand are elastic)
Rental
Price of
Apartment
Supply
Controlled rent
Shortage
0
Demand
Quantity of
Apartments
Price floor
– A barrier that keeps a price higher
than the equilibrium point is called a
price floor. In other words, the price
cannot go lower than the price floor.
– One example of a price floor is the
minimum wage.
A Market with a Price Floor
(a) A Price Floor That Is Not Binding
Price of
Ice-Cream
Cone
Supply
Equilibrium
price
$3
The government
says that icecream cones must
sell for at least $2;
this legislation is
ineffective at the
current market
price.
Price
floor
2
Demand
0
100
Equilibrium
quantity
Quantity of
Ice-Cream
Cones
A Market with a Price Floor
(b) A Price Floor That Is Binding
Price of
Ice-Cream
Cone
Supply
Surplus
$4
Price
floor
3
Equilibrium
price
Demand
0
Quantity of
Quantity Quantity Ice-Cream
Cones
demanded supplied
80
120
How the Minimum Wage Affects the Labor Market
Wage
Labor surplus
(unemployment)
Labor
Supply
Minimum
wage
Labor
demand
0
Quantity
demanded
Quantity
supplied
Quantity of
Labor
Minimum Wage Ideology
• These are contentious issues, where many
businesses and economists claim that
having a minimum wage destroys jobs and
depresses the economy.
• Others feel that these claims are not entirely
true, and that having a minimum wage
improves the quality of life for low wage
workers and can stimulate the economy.
Rationing
• Rationing is when the government limits the amount of a
commodity that you can buy. This can be done by first
come, first served, by lottery, or by coupon (as it was done
in WWII).
• This can create incentives for people to go around the
rationing and create a Black Market.