Price Controls Price Controls

government regulations to set either a maximum or minimum price for a product

Price Ceiling a government regulation stipulating the maximum

price that can be charged for a product

Price Floor a government regulation stipulating the minimum price

that can be charged for a product3-1© 2012 McGraw-Hill Ryerson Limited

LO3

Price Ceiling

• Used when present market price for a particular product is considered too high for many buyers

• The product is felt to be a necessity

• Example: rent control

3-2© 2012 McGraw-Hill Ryerson Limited

LO3

Price Ceiling • Price ceilings cause shortages

3-3© 2012 McGraw-Hill Ryerson Limited

LO3

Allocating Shortages

• The market (supply and demand)

• First come, first served

• Producers’ preferences

• Rationing

3-4© 2012 McGraw-Hill Ryerson Limited

LO3

a) Suppose the government introduces a price ceiling that is 20 cents different from the present equilibrium price. Would the result be a surplus or a shortage? Of what quantity?

b)If an illegal marketwere to develop, what would be the maximum illegal market price?

Self-Test

3-5© 2012 McGraw-Hill Ryerson Limited

LO3

Quota• A quota, or restricting output, can raise price

without causing a surplus

3-6© 2012 McGraw-Hill Ryerson Limited

LO3

a) In equilibrium, what is the total revenue received by producers?

b) Suppose that government imposes a price floor of $4 per kilo. What quantity will be demanded? What quantity will farmers produce? What quantity will government buy?

c) How much will it cost to buy the surplus?

Self-Test

3-7© 2012 McGraw-Hill Ryerson Limited

LO3