Controls on Prices
Price ceiling: a legal max on the price at which a good can be sold. (can’t cost more
than this) rent control
Not binding: the ceiling is more than the equilibrium price and all is normal.
Binding: ceiling is less than equilibrium and there is a shortage, more demanded
Must then ration the scarce goods among the large number of buyers
• Long lines, discrimination, bias
Ex: when there is a price ceiling on a good that would move to equilibrium,
excepting the higher price (inelastic) it causes shortages.
Ex: rent control: inelastic in beginning and the owners have full houses at low
prices so they have no incentive to keep up the houses or build new ones with
little rent. They then become elastic because they can move and want to leave
the badly kept houses. Responses are regulations.
Price floor: a legal min on the price at which a good can be sold. (can’t be sold for
less than this) wage
Binding: price floor that is more than equilibrium and results in a surplus.
Sellers are unable to sell all their goods.
Ex: min wage: lowest price for labor that any employer can pay.
• Supply of labor is determined by the workers. Demand of labor is
determined by the firms.
• When min wage is above equil. There is unemployment because there is
more workers supplied than demanded.
• Highly skilled workers have wages high above min wage and are not
affected. (not binding)
Tax incidence: how the burden of a tax is distributed among