U5: Government Influence on Supply and Demand: Price Controls

why are price controls enacted?

1. attempts to improve equity

2. to satisfy special interest of buyers or sellers

what is a price ceiling?

legal maximum price at which a good can be sold

price ceiling are only effective when they are set where?

below equilibrium price

what do price ceilings (negatively) cause?

shortages

what are some examples of price ceilings?

rent controlled apartments, gasoline, tickets to certain events, public utilities

what are the rationing solutions?

• first come, first serve

• seller’s discrimination

• lottery system

• government selection

how are price ceilings both good and bad?

• good: lower prices, for those lucky enough to obtain the item/service

• bad: limited availability, shortage

how do suppliers avoid price ceilings?

• sell on the black market (illegally) like scalping

• sell on the grey market

what do suppliers do in the grey market?

• suppliers can charge for associated goods/services that were formerly free (adding additional revenue)

• Provide less service/quality at the new lower equilibrium price (reduce costs)

what are price floors?

legal minimum price at which goods can be sold

when are price floors effective? what does this cause?

when set above equilibrium price, causes surpluses

who sets price floors?

set by the government (and suppliers, often; self-imposed)

What happened between manufacturers and retail stores?

• historically, manufacturers told retail stores they couldn’t sell their products at a price below what they set

• if stores refused to follow this policy, manufacturers refused to supply them with products

• walmart sourced supplies from China

What can you do with surpluses?

• don’t follow the price floor

• provide more services for the same price (BOGOs and complementary goods cheaper)

• absorb surplus (recycle and repurpose)

• change product names to reduce price/avoid floor

what have the technological advancements since WW2 increased?

supply of food

why is it bad if the price of food falls enough?

some farmers might consider farming, leading to a food shortage/crisis

what happens between agriculture businesses and governments? what happens to the supply available to consumers then?

• government purchases excess and surplus amounts to redistribute to poor, school lunch, foreign aid programs, or alternative uses (HFCS, ethanol for corn, etc.)

• supply available to consumers falls

what is the “ultimate price floor”?

minimum wage

what does a mandatory wage go to supply of labor?

increases supply of labor

what does a hike in minimum wage do to businesses?

cost of business increases, demand for labor decreases

results: varying outcomes (sometimes, there are higher unemployment levels, sometimes no change)