Market Disequilibrium

Price Ceilings and Price Floors cause market disequilibrium because they disrupt the natural dynamics of the marketplace (supply and demand)

Price Ceiling A legal maximum on the price at which a good can be sold.

(if government feels that the price for a good or service is too high)

Examples: Rent Control for apartments Electricity (NS Power)…Monopoly

PROS (Purpose)

- Help the poor by making housing more affordable

- Prevent prices from becoming unreasonably high…especially in cases of Monopolies

CONS

- Landlords cannot keep up with rising costs of maintenance. (which have not been frozen)

- Market inefficiency (shortages)

Case A No Point in having a price

ceiling.

Therefore, it is important to know where the equilibrium

point is before a price ceiling is established…

Case B Typical Price Ceiling Scenario

Example – Gasoline Prices.

An increase in the price of crude oil – shifts the supply curve of gasoline to the left in case (b). This results in a shortage of gasoline (excess demand)…causing motorists to wait for

hours to buy only a few gallons of gas.

Price Floor

A legal minimum on the price at which a good or service can be sold.

Very common example: Minimum Wages

PROS (Purpose)

- Help reduce the amount of poverty and raise living standards (avoid sweatshop conditions)

- Help people keep up with the rise of inflation (they raise it from time to time)

CONS

- Disrupt market equilibrium (surpluses)

- Increases unemployment

If left to forces of supply and demand, more workers would be hired at lower wages.

Price Floor - Surpluses

http://www.youtube.com/watch?v=zjXwvQz7f2o

Benefits the producers.