Chapter 4 Price Controls

Price Floor

• What is it: A legally set min price place on market pierce

• Binding vs. Non-binding price floor

  • Must set above the equilibrium price to be binding

  • Protects producers (gov. thinks price is too low)

    • Minimum wage

• Consequences?

  • Binding minimum wage leads to surplus of workers and generate unemployment

    • Winners: workers who were able to find a job

    • Losers: people who lost or could not find a job

Price Ceiling

• What is it: A legally set max price for the market

• Binding vs. nonbinding price ceiling

  • Must below equilibrium price to be binding

Consequences?

• Protects consumers 

• Example: Rent control

  • Quantity of apartments supplied falls, while quantity of apartments demanded increases, leading to a shortage of apartments