Demand, Supply and Price Controls
Price Floor is a Minimum Price the Government Sets for a product.
-Usually causes shortage because Qd>Qs (e.g Minimum Wage)
Price Ceiling is a Maximum Price the Govt. Sets for a product.
-Usually causes an excess supply as Qs>Qd
Price Controls are economically inefficient
Summary of Questions to be Asked:
1. Given the demand and supply equations, find the equilibrium
i) Solve the two equations to find the price and quantity of the equilibrium
2. What is the new price and quantity sold after an effective price control.
i) First Check if the Price control is effective (i.e if it brings about any
ii) Looking at the Graph, The intersection of the price control with the
supply tells the quantity produced while the control itself tells us the
iii) Excess Supply, if any, may be bought by the govt. when it intervenes. Common Exam Questions:
2012 Summer Term Test 1 Multiple Choice Q2
1. When the price of flour used to produce bread falls, the consumer surplus associated
with the consumption of bread
a. will definitely increase
b. will definitely decrease
c. will increase if bread is a normal good
d. will decrease if bread is an inferior good
e. none of the above
2012 Summer Term Test 1 Multiple Choice Q4
2. The government introduces a price floor (minimum price) for milk. The price floor is
above the market price. Which of the following will result from this price floor?
a. an increase in supply and decrease in consumer surplus
b. a decrease in quantity demanded and a decrease in consumer surplus
c. a decrease in demand and decrease in consumer surplus
d. no change in demand and an increase in consumer surplus
e. none of the above
2011 Fall Term Test 1 Short Answer Q3
3. What is the competitive market criticism of rent controls for the original tenants? You
may use a diagram but marks are for the explaination.
2009 Fall Term Test 1 Multiple Choice Q4
4. Suppose that 4 different government policies - price floor guarantee by government
purchase of surplus, Price ceiling that results in a black market price for all output,
Tax/unit, and Quota - result in exactly the same market price and quantity for a
particular commodity. Which of the following is false?
a. the loss of consumer surplus is the same for all 4 policie