Supply, Demand and Government Policies 09/26/2013
Controls on Prices
The buyers of any item always wish for a lower price
The sellers of any item always wish for a higher price
The two then lobby for the government to pass a law restricting the price fluctuation of the item
If the buyers are successful, the government will pass a law with a maximum price of the item (Price
If the sellers are successful, the government will pass a law with a minimum price for the item (Price
Affect of Price Ceilings on Market Outcomes:
The price ceiling is slightly above the equilibrium price.
This is a non binding price ceiling, and has barely any affect on the market except for keeping the price
reasonable for consumers.
Price naturally moves to the equilibrium price.
The price ceiling is below the equilibrium price.
The demand becomes significantly greater than the supply.
The scarce goods must be rationed among the consumers due to lack of supply.
Consumers do not get to purchase as much as the good as they wish to.
Affect of Price Floors on Market Outcomes:
The price floor is slightly below the equilibrium price.
Price naturally moves up to the equilibrium price
The price is above the equilibrium price.
Binding constraint on the market
Creates more supply than demand, resulting in a surplus of the product Evaluating Price Controls
Economists generally do not like price controls because they believe price should come about on their
own as a result of supply and demand curves.
The government imposes these in attempt to help the less fortunate but is often unsuccessful
A minimum wage makes employers less likely to hire the poor, rent ceilings make housing harder to find
A better solution would be subsidies (where the government pays a portion of the less fortunate salaries
This is expensive, making taxes necessary
When a government applies a tax to a certain product in attempt to raise money to fund a public project
there is often a clash in the dec