1. 1 Price Supports Here are two examples of government intervention in a market.

2. 2 price floor P S1 D1 Q Q1 P1 A price floor is a minimum legal price. The government enacts one when it is felt the market price is too low. So an effective legal minimum must be above the equilibrium price so price can not get down to P1. Qd Qs Pf a b c d e The downward arrow is here to suggest price can not get below Pf.

3. 3 price floor With the price floor we see: 1) higher price Pf, 2) lower quantity demanded - from Q1 to Qd. This is really also the amount traded. The amount traded has fallen because sellers can only sell what buyers buy. 3) Higher quantity supplied - Q1 to Qs. 4) surplus = Qs - Qd.

4. 4 One thing we notice with the floor is a surplus is created. What happens to the goods that are made and not purchased? Maybe the government will buy them – the government would have to pay (Qs – Qd)times Pf to buy the surplus. Maybe the government will ask producers not to make them.

5. 5 price ceiling P S1 D1 Q Q1 P1 A price ceiling is a maximum legal price. The government enacts one when it is felt the market price is too high. So an effective legal maximum must be below the equilibrium price. Price can then not legally get to P1. Pc Qs Qd The upward arrow is here to suggest price can not get above Pc.

6. 6 price ceiling With the price ceiling we see: 1) lower price Pc, 2) lower quantity supplied - from Q1 to Qs. This is really also the amount traded. The amount traded has fallen because buyers can only buy what sellers sell. 3) Higher quantity demanded - Q1 to Qd. 4) shortage = Qd - Qs.

7. 7 price ceiling P S1 D1 Q Q1 P1 This screen is a repo of a previous screen. Imagine you are sitting at P1, do it! Where do you look for the ceiling? Down! Why not up? A ceiling above P1 would cause a surplus and we know with a surplus the price will fall. It would fall to P1. Pc Qs Qd The upward arrow is here to suggest price can not get above Pc. Price ceilings above equilibrium are not binding Or are not effective!