Price Ceilings and Price
Floors!
Supply, Demand, and
Government Policies
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In a unregulated market system with open entry and
exit, market forces establish equilibrium prices and
quantities.
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While equilibrium conditions may be efficient, not
everyone will be satisfied with the outcomes.


Consumers
Producers
Price Controls…
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Are usually enacted when policymakers believe the
market price is unfair to buyers or sellers.
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Result in government-created price ceilings or price
floors.
Price Ceiling and Price Floor
Price Ceiling
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A legally established maximum price at which a good
can be sold.
Price Floor
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A legally established minimum price at which a good
can be sold.
Price Ceiling
Two outcomes are possible when the
government imposes a price ceiling:
The price ceiling is not binding if set above the
equilibrium price.
The price ceiling is binding if set below the
equilibrium price, leading to a shortage.
Price Ceiling that is NOT
Binding
Price of
Oranges-lb
Supply
Price
ceiling
4
$3
Equilibrium
price
Demand
0
100
Quantity of
Oranges lbs
Price Ceiling that IS Binding
Price of
Oranges-lb
Supply
Equilibrium
price
$3
Price
ceiling
2
Shortage
Demand
0
75
Quantity
supplied
125
Quantity
demanded
Quantity of
Oranges-lbs
Effects of Price Ceiling
A binding price ceiling creates…
 shortages because QD > QS
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Gasoline shortage of the 1970s
 nonprice rationing
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Long lines
Discrimination by sellers
Rationing Resources
u Price Rationing


Efficient
Impersonal
u Non-price Rationing

Long lines
 Waste buyers time  Inefficient

Discrimination by sellers:
 Goods may not go to buyer who value it most
highly  Inefficient
 Potentially unfair
Lines at the Gas Pump
In 1973, OPEC raised the price of
crude oil in world markets. Because
crude oil is the major input used to
make gasoline, the higher oil prices
reduced the supply of gasoline.
What was responsible for the long
gas lines?
Economists blame government
regulations that limited the price oil
companies could charge for gasoline.
Initially …
Price of
Gasoline
Supply
1. The price
ceiling
is not
binding . . .
Price ceiling
P1
Demand
Q1
Quantity of Gasoline
Then …
Price of
Gasoline
S2
2. supply falls
...
S1
P2
Price ceiling
3. . . . the price
ceiling becomes
binding . . .
P1
4. . . .
resulting
in a
shortage.
Demand
QS
QD Q
1
Quantity of Gasoline
Rent Control
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Rent controls are ceilings placed on the rents that landlords
may charge tenants
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Goal: to help the poor by making housing more affordable
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New York City rent controls were enacted as a WWII
emergency measure
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Some units still under rent control today
Many rich tenants in rich neighborhoods paying low WWII
prices.
Rent Control in the Long Run...
Rental
Price of
Apartment
Supply
Controlled rent
Shortage
Demand
0
Quantity of
Apartments