Chapter 4 Price Controls

Macroeconomics (Econ 201) Chapter 4 price controls summary study for midterm exam

Price Floor

A legally set minimum price imposed on a market price.

In order for a price floor to be binding

the price floor must be set above the equilibrium price

Binding price floor protects

producers when the government believes the equilibrium price is too low

what causes extreme equilibrium prices

too much market activity

Minimum wage

The lowest wage that employers can legally pay their employees.

Example of price floor

minimum wage

Consequences of binding minimum wage

Leads to a surplus of workers and generates unemployment

Price Ceiling

A legally set maximum price for a market

winners of minimum wage

workers who find jobs

losers of minimum wage

those who are let go or cannot find jobs

In order for a price ceiling to be binding

price must be set below the equilibrium price

Price ceilings protect

consumers from equilibrium prices that are too high

example of price ceiling

rent control

consequences of price ceilings

Shortages occur as demand exceeds supply, quality deterioration due to lack of competition, and inefficient allocation of resources.

consequences of rent control

An increase of apartments demanded and decrease in supply causing a shortage of apartments

price controls

government-imposed restrictions on the prices that can be charged for goods and services in the market, aiming to stabilize prices and protect producers and consumers.

price controls effects

some people are made better off, some people are made worse off, and the economy generally suffers as deadweight loss will occur