Price Floors & Price Ceilings

Government Price Controls

Price

Qty

T-Shirts

D1

S1

--------------------------------------P1

Q1

E1

Gov’t Price Controls• Government Price controls set a maximum or minimum price for a

specific good or service– Price floors = minimum price

– Price ceilings = maximum price

• Price controls often disrupt market equilibrium (E1)

– Usually lead to lower overall market efficiency

– Often create shortages or surpluses of goods/services

• Price controls were used in the 1970’s but are rarely used in the U.S. economy today.– Used in Venezuela today---yes, shortages & surpluses are occurring!

Price

Qty

T-Shirts

D1

S1

--------------------------------------

$11 E1

Price Floor$13 -------------------------

------------------------

QD QS

Surplus of Supply

Qty supplied &Qty Demanded

Not enough buyers at $13Too many sellers at $13

End result: surplus of supply

Less T-Shirts sold!The market shrinksFrom 1,000 units to QD

Example Problem #1: Price Floor @ $13

1000

Price

Qty

T-Shirts

D1

S1

--------------------------------------

$11 E1

Price Floor$9

No Effect on market equilibrium

Price & Quantity remain unchanged

New law does not change equilibrium

Example Problem #1 Price Floor @ $9

1000

Price Floor Summary

• Price floors above market equilibrium cause a surplus of supply– The market shrinks! (less goods are sold by Q1 -Qd)

– Qty Demanded falls while quantity supplied rises (Qs – Qd = surplus)

• Price floors below market equilibrium have no effect– They do not change market equilibrium

Rent Control: Price Ceiling

D1

S1

$900 E1.Shortage of Supply

Price Ceiling$700

Price Ceiling imposed of $700

3,000

Apartments

----------

----------

QS QD

Qty D rises but Qty S fallsResult: Less apartments rented! (3000 - QS)

Price Ceiling Continued….

D1

S1

$900 E1

Price Ceiling.

No Effect—(Above Mkt. Equilibrium)

$1000

Price Ceiling imposed of $1,000

3,000

Apartments

Gov’t Price Control Summary

• Price floors: (example: min. wage)

– Above market equilibrium cause a surplus of supply• The market shrinks! (less goods are sold!)

• Quantity supplied rises, quantity demanded falls

– Below market equilibrium have no effect

• Price Ceilings: (example: rent control)

– Below market equilibrium cause a shortage of supply• The market shrinks (less goods are sold by Q1 - Qs)

• Quantity demanded rises while quantity supplied falls

– Above market equilibrium have no effect

Federal Minimum Wage History

1980 $3.101981 $3.351990 $3.801991 $4.251996 $4.75 1997 $5.152007 $5.85 2008 $6.552009 $7.25

 

    minimum wage rates higher than the Federal

      

    minimum wage rates the same as the Federal

No minimum wage law

      

minimum wage rates lower than the Federal

    American Samoa has special minimum wage rates

 

California$8.00

Benefits Costs

Raise the Federal Minimum Wage to $1000/hr

Minimum Wage: Gov’t Imposed Price Floors

D1

S1

$725

Q1

.Surplus of Supply

Price Floor$1000

Minimum wage rises: 725/hr => 1000/hr

Min. Wage Workers

E1

-----------------------

-----------------------

QDQS

End Result: Less Workers hired! (Q1 to QD)

surplus of workersQty D falls while Qty S rises

Q1 to QD is a decrease in Quantity demanded

Price Floor: MARIN & Min. Wage

D1

S1

$950E1

Price Floor.

No Effect—(floor is below market equilibrium)

$800

Marin Minimum wage is approx. 800/hr

Min. Wage Workers

End Result: no change in price or quantity