Price Floors & Price Ceilings Government Price Controls Price Qty T-Shirts D1D1 S1S P1P1 Q1Q1 E1E1

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 (E 1 ) –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 D1D1 S1S $ 11E1E1 Price Floor $ QDQD QSQS Surplus of Supply Qty supplied  & Qty Demanded  Not enough buyers at $13 Too many sellers at $13 End result: surplus of supply Less T-Shirts sold! The market shrinks From 1,000 units to Q D Example Problem #1: Price $

Price Qty T-Shirts D1D1 S1S $ 11E1E1 Price Floor $9$9 No Effect on market equilibrium Price & Quantity remain unchanged New law does not change equilibrium Example Problem #1 Price $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 D1D1 S1S1 $900 E1E1. Shortage of Supply Price Ceiling $ 700 Price Ceiling imposed of $700 3,000 Apartments QSQS QDQD Qty D rises but Qty S falls Result: Less apartments rented ! ( Q S )

Price Ceiling Continued…. D1D1 S1S1 $900 E1E1 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$ $ $ $ $ $ $ $ $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 ratesspecial minimum wage rates California $8.00

Benefits Costs Raise the Federal Minimum Wage to $10 00/hr

Minimum Wage: Gov’t Imposed Price Floors D1D1 S1S1 $7 25 Q1Q1. Surplus of Supply Price Floor $10 00 Minimum wage rises: 7 25 /hr => /hr Min. Wage Workers E1E QDQD QSQS End Result: Less Workers hired! (Q1 to QD) surplus of workers Qty D falls while Qty S rises Q1 to QD is a decrease in Quantity demanded

Price Floor: MARIN & Min. Wage D1D1 S1S1 $9 50 E1E1 Price Floor. No Effect —(floor is below market equilibrium) $ 8 00 Marin Minimum wage is approx /hr Min. Wage Workers End Result: no change in price or quantity