AP ECONOMICS—Ippolito
Name: ___________________________
PRICE FLOORS & PRICE CEILINGS
The Minimum Wage:
Good Idea or Bad Idea?
What do you think of the minimum wage law? If we have so much “faith” in the Free Market, why does the Government feel
it necessary to regulate the wage market? The Federal Government requires business to pay a minimum working wage of $5.15
to all employees. Do you agree with this law or not? Should the minimum wage be increased, decreased or eliminated?
We have learned that all decisions have both an opportunity cost and an opportunity benefit. What is the opportunity cost of
the minimum wage law? What is the opportunity benefit? Does the benefit outweigh the cost? This analysis is the basis for
economic decision making: cost/benefit analysis.
Increasing the U.S. Federal Minimum Wage is a popular idea because it seems to help those with low incomes. It also rewards
individuals for working rather than encouraging transfers through such government programs as welfare and medicare. Finally,
it appears to place the cost on business rather than directly on taxpayers.
When analyzing policies such as this, economists must determine whether policies achieve their stated goals. An economist
must calculate ALL direct and indirect costs of these policies, determine who bears these costs. Finally, lets consider some of
the consequences, intended and otherwise, of an increase in the U.S. minimum wage.
Suppose we assume that raising the U.S. Federal Minimum Wage will improve living standards for those who earn the minimum
wage in the U.S., a logical concern would be what are the opportunity costs of a minimum wage? Will raising the U.S. Federal
Minimum Wage cause widespread layoffs? Will increased production costs result in reduced profits for businesses or will
increased costs be passed along to consumers in the form of higher prices?
The Minimum Wage is an example of a price floor. A price floor specifies the minimum legal price for a good/service.
List some benefits and costs of a higher minimum wage:
Rent Control:
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Good Idea or Bad Idea?
Rent control is an example of a Government imposed price ceiling. That is, a maximum price a producer can charge for a
good/service..
Rent Control gained popularity after World War II brought yet another housing crisis to many of America's cities. The federal
government stepped in passing emergency laws putting a ceiling on rents in many large cities. (maximum price)
In recent years, as housing shortages and renter populations have grown, rent control systems have sprung up in Massachusetts
(which has since outlawed rent control), New Jersey, Maryland, Washington D.C., Connecticut, and California (where it exists in
some form in almost all the cities of the "high-rent" Silicon Valley).
Tenant groups in most large cities without rent control regularly agitate for it, while rental property owners in areas with rent
control agitate against it. Once rent control exists in a given area, however, it is very difficult to repeal it, and the reason is
simple: the majority of residents in the area are probably tenants either benefiting from the system or hopeful of benefiting in the
future.
So the question remains, what are the opportunity benefits and opportunity costs associated with rent control
List some benefits and costs of a lower price ceiling for rents:
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Example Problems
1) Draw a Supply & Demand Graph for T-Shirts: market equilibrium:
 What happens when the Government sets a price floor at $1300
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Price =$1100 Qty D = 1,000
Explain in the graph how this will distort the natural market equilibrium?
What happens if the price floor is set at $900
2) Draw a Supply & Demand Graph for Apartments: Market equilibrium:
 What happens when the Government sets a price ceiling at $700
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Explain in the graph how this will distort the natural market equilibrium?
What happens if the price ceiling is set at $1,000
Price =$900 Qty D = 3,000