PRICE CONTROLS THE PRICE IS NOT FREE TO AUTOMATICALLY MOVE BACK TO EQUILIBRIUM

GOVERNMENT INTERVENTION Sometimes the government will intervene in a market to determine the price as the outcome could be seen as unfair (to consumers- too high, or producers- too low). E.g. Minimum wage (currently at $12.50)

MINIMUM PRICE (FLOOR PRICE) Sometimes a minimum price is set in a market above the equilibrium as it is seen as being unfair to the suppliers in that particular market. In a market where there are a combination of very high and very low prices, a minimum price may be set which it cannot fall below. This price must be above equilibrium to be effective.

S D Minimum price QeQe PePe Qs Qd Price ($) Quantity (units) surplus

As a result of the new minimum price (above equilibrium) a surplus has now been created.

MAXIMUM PRICE (CEILING PRICE) Maximum prices are used to protect our consumers from having to pay ridiculously high prices for certain goods and services. A maximum price will be set below equilibrium, otherwise it will not be effective.

S D Maximum price QeQe PePe Qd Qs Price ($) Quantity (units) shortage

As a result of the new maximum price (below equilibrium) a shortage has now been created.

TAXES AND SUBSIDIES

DIRECT TAXES Tax on income and earnings. E.g. Income tax. If direct taxes are increased this will reduce people’s disposable income shifting the demand curve to the left. Price ($) Quantity (units) S D1 D2 Q1 P1 P2 Q2

INDIRECT TAXES A tax on consumption or spending. E.g. GST. An indirect tax will affect the supply curve Remember that GST is added on top of the price the seller will receive therefore will shift the supply curve UP (vertically) to reach this new price. Price ($) Quantity (units) S2 D S1 Q1 P1 Q2 P2

At the new price the difference between the original and new supply curves should reflect the tax, not the difference between the original and new equilibrium points (tax=$20, (70 -50) NOT $10). Price ($) Quantity (units) S2 D S The amount of the tax.

SUBSIDIES = payment to producers from government in order to reduce costs of production. A subsidy has the opposite effect of an indirect tax…it moves the supply curve DOWN vertically. Price ($) Quantity (units) S1 D S NOTE: The $2 subsidy has caused the price to fall from $12 to $11.