Markets in action

Case 1 PRICE Floor

 Price Floor
• Gov. sets a minimum price for some goods &
services to protect poor producers eg.
Guarantee crop prices, minimum labor wages.
• Effective price floor has to be above free market
price.
• Major problem is the existence of excess supply,
thus effective intervention requires some
complementary measures to get rid of excess
supply, gov. may buy the excess crop & store it.
 Case 2 Price Ceiling
• Gov. sets a maximum price for some essential
goods & services to protect poor consumers eg
rent control or prices of rice or sugar.
• Effective price ceiling has to be below free
market price.
• Main result is excess demand & shortages.
• Thus gov. should adopt other complementary
procedures or else a black market usually occurs.
 Case 3 Sales tax burden
• If demand is relatively inelastic as the product
had few substitutes & the supply is elastic, the
consumer bears most of the sales tax burden.(
extent of price increase).
• If demand is elastic, while supply is inelastic ,
the producer bears the majority of the tax
burden. (tax – extent of price increase)