Chapter 6

Markets in Action
Pages 121-142
Policies aimed at controlling prices can
produce unexpected outcomes.

For Example

Government Laws
in respect of

Rent Control Minimum Wage

I. Price Ceilings
 The Case for Price Ceilings
 Effects of ‘Non-Binding’ Ceilings
 Effects of ‘Binding’ Ceilings

II. Price Floors

 Effects of Price Floors on Market Operations
 The Minimum Wage
 Main Objective

To help the poor & make

housing more affordable

Does it work?
Notes

1. DEFINITION: A price ceiling is a government regulation of the

maximum amount that may be legally charged.

2. If landlords or owners of property charge above the price

ceiling, then their actions are ILLEGAL.

3. However, if governments set the minimum price/rents of

appartments to that above the market-determined level, then what
do you think will happen?
 I. Price Ceiling ‘Non-binding’
($) P S

400 . .
Price Ceiling.

300 . E Market Price

200

D
0
1 3 5 7 9 Q
000’s
Notes on the previous graph

1. Non-Binding: The equilibrium/market price has already been

determined, so a legal minimum in the form of a price ceiling
above that value is non-binding.

2. How may landlords react?

3. What is the potential impact on tennants?

Notes

1. OPPOSITE CASE SCENARIO: The following graph

represents a government price ceiling that is BINDING

2. STATE ACTION: The government sets the price ceiling lower

than the market price. Why would it want to do this?

3. Take a look at the following graph and decide whether you

think the government was wise to lower the market price of
appartments.
 I. Price Ceiling ‘Binding’
($) P S

400

300 . E

200 . . Price Ceiling

D
0 1 3 5 6 7 9 Q
000’s
Notes on the previous graph

1. Binding: The equilibrium/market price is now illegal

2. How does this affect tennants or what is the impact?

3. How does this affect landlords and how may they react?

4. In what other ways can landlords negatively react?

1. A non-binding rent ceiling has no
effect;

2. A binding rent ceiling creates

shortage;

3. The market option works best

(demand and supply allocate);

4. In such cases governments support

via housing benefits.
 Minimum Wage

Defined as: the lowest price that an

employer may pay for labour.

What are the effects of government

intervention?
Notes

1. When a price floor is applied to labour markets it is called the

minimum wage
2. LABOUR MARKET:
* The demand curve represents the firm / employers
* The supply curve represents the workers
3. Under what conditions do firms demand more labour and
why?

4. Under what conditions are workers happy to offer their

services and skills?
II. Price Floors The Minimum Wage
Wage ($) Supply of Labour

5.00
3.75
2.50
1.75
.
. .
Equilibrium Wage /
Employment

Shortage Minimum Wage

1.00
Demand
0 for Labour
1 2 3 4 5 6 7 8 000’s of L
Notes on the previous graph
1. Assume the same starting conditions in the market where the
equilibrium Qd = Qs at 5000 = $2.50

2. GOVERNMENT INTERVENTION:
* Minimum statutory wage introduced below the market level
– How does this influence decisions at/or:
(i) The firm level?
(ii) For workers / labour market?

3. Why do governments take this course of action?

4. Take a look at the following graph and decide whether
government action is binding or non-binding.
Additional space for notes
1.

2.

3.
II. Price Floors The Minimum Wage
Wage ($) Supply of Labour

5.00
3.75
2.50
...
Surplus Minimum Wage

Equilibrium Wage /
1.75 Employment
1.00
Demand
0 for Labour
1 2 3 4 5 6 7 8 000’s of L
Notes on the last graph

1. Assume the same starting conditions in the market where the

equilibrium Qd = Qs at 5000 = $2.50
2. GOVERNMENT INTERVENTION:
* Minimum statutory wage goes up – what are the effects?
* Firms now expected to pay more
* People see the attraction of a higher minimum wage
3. How does this affect labour supply & the government?

4. How does this affect firms and how may they react?
Additional space for notes
1.

2.

3.
 The Maquiladoras
Attractive for American & Asian assembly
operations (esp. 1970-1990).
Factors

1. Government 2. Wages &

Protection
Impact
Productivity increased,
but wages initially didn’t!
I. Price Ceilings: Rent Control
If the ceiling that landlords can charge is below the
equilibrium level, then shortage occurs.

II. Price Floors: The Minimum Wage

If the floor is above the equilibrium wage, then the
supply of labour increases but demand falls –
hence, there is a labour surplus.