PRICE CONTROL:

PRICE CEILING A price imposed by government that is set below the equilibrium
price. Prices cannot rise above this price.

Below the equilibrium, there is a shortage, because Qs > Qd, under free market, the
forces of demand and supply would exert an upward pressure on price towards the
equilibrium however the price can only hit price ceiling.

CONSEQUENCE OF PRICE CEILING

Shortage (excess quantity demanded)
Lead to smaller quantity supplied and sold
Underallocation of resources to the good and failure to achieve Allocative efficiency.
Shortage= too few resources are allocated to the production of good, instead of
producing at optimum output
Underground (black markets) since there is shortage, there may be illegal selling
g&s to interested buyers at price higher than legal maximum

EXAMPLE OF PRICE CEILING

Rent control (to help low income people)
shortage of housing (quantity of housing lowered), It becomes unprofitable for
landlords to maintain their rental houses.

PRICE FLOOR (minimum price) - a price imposed by an authority and set above
the market price. Prices cannot fall below this price.


CONSEQUENCE OF PRICE FLOOR
Surpluses. (gov have to buy and store = cost $$$)
Smaller quantity demanded and purchased
More wages for people yay
Firm inefficiency no incentives to cut cost by using more efficient production
methods (because high selling price offers them protection against competitors)
Higher than EQ price Overallocation of resources to production of that good.
Illegally try to sell surplus at price below legal minimum.

EXAMPLE OF PRICE FLOOR

Minimum wages
possible illegal employment at wage below minimum wage. (Illegal immigrants
who may be willing to supply their labour at low wage)
Price floor for agriculture goods
result in surplus (P up= S up along curve)/ Farmers revenue increase/
Consumers are worse off: smaller Qd and higher price/ Encourage inefficient
producers since high price offers protection against efficient low- cost competitors.
Government has to buy surplus equal to quantity of surplus times the prices at it
is sold. Storerage costs!!!! Agriculture good have short shelf life