Price controls: are government rules or laws that inhibit the formation of market-determined
Quotas: Physical restriction on output.
Price ceilings: If the government decides to impose a price limit beneath the original
equilibrium point E0the resulting price control is called a price ceiling. The resulting problem of
course is excess demand because individuals wish to purchase more goods than are on the
market. In a free market the price would adjust upward to eliminate the shortage, but as it is a
controlled market, it cannot. So some other way of allocating the available supply must
Price floors: An effective price floor results when the government imposes a price control
above the market equilibrium E ,0or market clearing price. This will result in excess supply
because suppliers wish to produce more than buyers are willing to purchase.
Note: for both price ceilings and floors, the actual quantity traded is the lesser of the
demand quantity or supply quantity at the going price, short side dominates.
Quotas: represent the right to supply a specific quantity of a good to the market; it is a method
of keeping the price higher that the free market equilibrium price. As an alternative to creating
a price floor the government can impose a quota/ restrict supply to generate a high price.
Summing individual differences:
Market demand: is the horizontal sum of the individual demands at each price.
Market supply: represent the sum of the producers supply curves at each price in an industry.
What how and for whom
1. The market decides how much of a good or service should be supplied by finding the
price at which quantity demanded equals quantity supplied.
2. The market determines for who the goods and services