Applications of Demand and Supply

“The visible outcome of a government imposed price control is “the sight of

housewives and children standing in long lines before the groceries, a spectacle
familiar to everybody who has visited Europe in this age of price control.”

-Ludwig Von Mises

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In the last module, we said that a market
will always find equilibrium…if left alone
If left alone, 5
units of this good
will be sold for $5
each.

But in some
cases, markets
For this market, are not left
the equilibrium alone…
price will be $5

For this market, the equilibrium

quantity will be 5 units
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Sometime markets are interfered with.
Here is how this might happen

That good is …The people that

too cheap... make it could
never make a
living…

…We should
pass a law
making it illegal
to sell it below a
certain price!

And a price floor is born!

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What is a price floor?

A price floor
occurs when a
government or
some other If a price floor
agency is set at $7
requires sellers
to sell at a
price above
equilibrium

Then Qs>Qd resulting in a surplus.

In great
A this case Qd = 3 and
example of aQs = 7. floor
price We have a 4 unit surplus.
is minimum wage.
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Real world price floor example:
minimum wage

In this case of minimum wage,

there is a surplus of unskilled
labor which manifests itself as
much higher unemployment
rates for younger workers.

Notice that workers aged

16-19 (that may have little
skill and may be
candidates for minimum
wage) have a much higher
unemployment rate.
There is a surplus of them!
5
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What is a price ceiling?

A price ceiling
occurs when a
government or
some other
agency
requires sellers
to sell at a
price below
If a price ceiling
equilibrium
is set at $4

Then Qd>Qs resulting in a shortage.

A good example
In this of this
case, Qd=6 andisQs=4.
concert
We or sports
have events
a 2 unit tickets.
shortage.
The market would bear a higher cost, but scalping is illegal 6 of 11
Real world price ceiling example: rent control

Look at these rents for an

apartment in Manhattan!

If a price ceiling of
$1,500 per unit were
imposed, landlords
would not be as excited
about renting their
apartments.
Nine grand for a
one bedroom
So what would happen? apartment…are
you serious?!

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When markets are interfered
with…strange things can happen

•1. New construction would be discouraged

•2. Existing housing would deteriorate
•3. Mobility for consumers would decrease
•Renters within rent controlled programs are less
likely to move given other criteria. This can cause
increased traffic congestion and misallocate Note: Qd > Qs
housing resources.
•6. Consumer entry costs would increase
•Housing scarcity may result in finders' fees.
Programs may require proof of eligibility which
requires resources.
•7. May lead to discrimination
•Without the price mechanism to “clear the market”,
other factors are considered.

New construction would not occur

and existing buildings would become
dilapidated!

Source: Primarily from National Multi-housing Council 8 of 11

In summary

Markets act as rationing mechanisms

allowing output to be distributed.

Those who want a good badly enough

can pay the equilibrium price for it.

However, if some authority like a government

prevents a market from reaching equilibrium,
then the market cannot clear.

In these cases, shortages (or surpluses) will

develop as prices are artificially low (or high).

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Individual Exercise –
click to see the answers

S What is the equilibrium price and

quantity in this market?
$6 and 2 units

What would happen if a price

ceiling of $4 were implemented?

A shortage of 4 units
would result
D
What would happen if a price floor
of $5 were implemented?
Remember
Nothing! That – only
floorfloors and
is below
ceilings
the that preventprice!
equilibrium the market
from reaching equilibrium have an
impact! 10 of 11
Individual Exercise –
click to see the answers

What is the equilibrium price and

quantity in this market?

S $4 and 4 units

What would happen if a price

ceiling of $3 were implemented?

A shortage of 2 units
would result
D
What would happen if a price floor
of $6 were implemented?
A surplus of 4 units would
result.

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