AS Economics

AS Economics
Maximum and Minimum Prices

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Price Control
 Price control is a legal restriction on how high or how low a market price
may go.
 A price ceiling is a maximum price sellers are allowed to charge for a

good or service.
 Examples: rent control in the housing market, utilities (e.g. water, gas &
electricity), staple foodstuff (e.g. bread, rice, cooking oil, etc.)
 A price floor is a minimum price buyers are required to pay for a good or
service.
 Examples: minimum wage in the labour market, agricultural commodities Dr. Sylvain Hours
(e.g. grains, livestock and dairy products), demerit goods (e.g. alcohol, postmaster@econdoctor.com
cigarettes, etc.) www.econdoctor.com
Price Control
 In order to be effective, a price ceiling (i.e. maximum price) must be set
below the equilibrium price.
 In that case, the price ceiling causes a persistent shortage.
 A price ceiling that is set above the equilibrium price is ineffective (i.e.
its introduction has no influence on the market equilibrium).
 In order to be effective, a price floor (i.e. minimum price) must be set

above the equilibrium price.
 In that case, the price floor causes a persistent surplus.

Dr. Sylvain Hours
postmaster@econdoctor.com
 A price floor that is set below the equilibrium price is ineffective (i.e. its WeChat: sylvainhoursCN
introduction has no influence on the market equilibrium). www.econdoctor.com
Price Ceiling
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Price Ceiling
PRICE
QUANTITY
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Price Ceiling
PRICE S
QUANTITY
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Price Ceiling
PRICE S
QUANTITY
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Price Ceiling
PRICE S
E
∗
𝑝
QUANTITY
∗
𝑞

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Price Ceiling
PRICE S
E
∗
𝑝
𝑝
QUANTITY
∗
𝑞

Dr. Sylvain Hours
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Price Ceiling
PRICE S
E
∗
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𝑝
QUANTITY
𝑞
𝑆 𝑞
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Price Ceiling
PRICE S
E
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𝑝
QUANTITY
𝑞
𝑆 𝑞
∗
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EXCESS DEMAND
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Price Ceiling
PRICE S
THE PRICE CEILING

E DOES LEAD TO A
∗
𝑝 SHORTAGE BECAUSE
IT IS SET BELOW THE
EQUILIBRIUM PRICE.
𝑝
QUANTITY
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𝑆 𝑞
∗
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𝐷
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EXCESS DEMAND
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Price Ceiling
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Price Ceiling
PRICE
QUANTITY
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Price Ceiling
PRICE S
QUANTITY
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Price Ceiling
PRICE S
QUANTITY
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Price Ceiling
PRICE S
E
∗
𝑝
QUANTITY
∗
𝑞

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Price Ceiling
PRICE S
𝑝
E
∗
𝑝
QUANTITY
∗
𝑞

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Price Ceiling
PRICE S
𝑝 THE PRICE CEILING

DOES NOT LEAD TO
E
𝑝 ∗ A SHORTAGE
BECAUSE IT IS SET
ABOVE THE
EQUILIBRIUM PRICE.
QUANTITY
∗
𝑞

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Price Floor
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Price Floor
PRICE
QUANTITY
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Price Floor
PRICE S
QUANTITY
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Price Floor
PRICE S
QUANTITY
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Price Floor
PRICE S
E
∗
𝑝
QUANTITY
∗
𝑞

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Price Floor
PRICE S
𝑝

E
∗
𝑝
QUANTITY
∗
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Price Floor
PRICE S
𝑝

E
∗
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QUANTITY
𝑞
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∗
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Price Floor
PRICE S
𝑝

E
∗
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QUANTITY
𝑞
𝐷 𝑞
∗
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EXCESS SUPPLY
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Price Floor
PRICE S
𝑝

THE PRICE FLOOR
E DOES LEAD TO A
∗
𝑝 SURPLUS BECAUSE IT
IS SET ABOVE THE
EQUILIBRIUM PRICE.
QUANTITY
𝑞
𝐷 𝑞
∗
𝑞
𝑆
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EXCESS SUPPLY
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Price Floor
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Price Floor
PRICE
QUANTITY
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Price Floor
PRICE S
QUANTITY
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Price Floor
PRICE S
QUANTITY
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Price Floor
PRICE S
E
∗
𝑝
QUANTITY
∗
𝑞

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Price Floor
PRICE S
E
∗
𝑝
𝑝

QUANTITY
∗
𝑞

Dr. Sylvain Hours
www.econdoctor.com
Price Floor
PRICE S
THE PRICE FLOOR

E DOES NOT LEAD TO
∗
𝑝 A SURPLUS BECAUSE
IT IS SET BELOW THE
EQUILIBRIUM PRICE.
𝑝

QUANTITY
∗
𝑞

Dr. Sylvain Hours
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Advantages of Price Control
 Improve the allocation of resources
 If a free-market allocates too many resources to the production of a good or

service (e.g. demerit goods or negative externalities), then price control can
be used to correct this market failure.
 Promote equity
 Price floors can be used to support the income on some sellers while price
ceilings can be used to preserve the purchasing power of some buyers.
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Limitations of Price Control
 Wasted resources
 In the case of a price ceiling, the resources buyers have to use in order to cope
with the shortage entail opportunity costs (e.g. time spent queuing).
 In the case of a price floor, the resources that sellers have to use in order to cope
with the surplus entail opportunity costs (e.g. time spent looking for a job).
 Black markets
 The existence of a shortage or a surplus might induce buyers and sellers to enter
into illegal agreements (e.g. backhanders, undeclared work, etc.).
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Limitations of Price Control ONE STEP
FURTHER
 Inefficiently low or high quality
 In the case of a price ceiling, quality is likely to be inefficiently low because some
buyers may prefer to pay a higher price in exchange for better quality but the
price ceiling deters sellers from supplying high quality goods and services.
 In the case of a price floor, quality is likely to be inefficiently high because some
buyers may prefer to purchase goods or services of lower quality at a lower
price but the price floor prevents sellers from meeting demand in that segment.
 Inefficient allocation of purchases or sales among buyers or sellers
 In the case of a price ceiling, purchases are likely to be inefficiently allocated

among buyers because the good or service might not be sold to those who value
it the most (i.e. those with the highest willingness to pay)
 In the case of a price floor, sales are likely to be inefficiently allocated among Dr. Sylvain Hours
sellers because the good of service might not be sold by those who value it the postmaster@econdoctor.com
least (i.e. those will the lowest willingness to accept). www.econdoctor.com
Limitations of Price Control ONE STEP
FURTHER
 Under-allocation of resources
 In the absence of any market failure, the « invisible hand » of the market leads
to the best possible allocation of the resources, a situation known as allocative
efficiency.
 However, the introduction of a price floor or a price ceiling leads to a decrease

in the quantity traded and therefore to fewer resources being allocated to the
poduction of the good or service.
 It follows that price control leads to an under-allocation of resources which

causes a loss in allocative efficiency known as a Deadweight Loss (DWL).
Dr. Sylvain Hours

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AS Economics - 13 - Government Microeconomic Intervention (Maximum and Minimum Prices)

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AS Economics - 13 - Government Microeconomic Intervention (Maximum and Minimum Prices)

Hochgeladen von

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Verfügbare Formate

Maximum and Minimum Prices

 A price ceiling is a maximum price sellers are allowed to charge for a

 In that case, the price ceiling causes a persistent shortage.

 In order to be effective, a price floor (i.e. minimum price) must be set

 In that case, the price floor causes a persistent surplus.

Dr. Sylvain Hours

Dr. Sylvain Hours

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THE PRICE CEILING

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𝑝 THE PRICE CEILING

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THE PRICE FLOOR

 If a free-market allocates too many resources to the production of a good or

Dr. Sylvain Hours

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 Inefficient allocation of purchases or sales among buyers or sellers

 In the case of a price ceiling, purchases are likely to be inefficiently allocated

 However, the introduction of a price floor or a price ceiling leads to a decrease

 It follows that price control leads to an under-allocation of resources which

Dr. Sylvain Hours

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