Price Controls
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Setting a minimum or maximum prices by the government in order to stop the market price mechanism working.
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Price control will result in disequilibrium, shortages, and surpluses
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Common example: Food-price control & Rent control
Price Ceiling
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Legal maximum price for a particular good
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Below equilibrium price
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Initially the market was at an equilibrium with price Pe and quantity Qe. After the price ceiling is imposed on the market, it creates a disequilibrium / excess demand at price Pc, which at price Pc the quantity demanded is way higher than the quantity supplied.
Effect on market outcome
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Shortages
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Non-price rationing
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Underground market
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Underallocation of resource
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Allocation inefficiency / Welfare Loss
Consequence for market outcomes
Consequence of Price Ceiling for stakeholders
Price Floor
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Legal minimum price for a particular good
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Price must be above equilibrium price
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Initially the market was at an equilibrium with price Pe and quantity Qe. After the price floor is imposed on the market, it creates a disequilibrium / excess supply at price Pf, which at price Pf the quantity supplied is way higher than the quantity demanded.
Effect on market outcome
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Surpluses
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Government measures to dispose of surpluses
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Firm inefficiency
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Overallocation of resources
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Allocation inefficiency / Welfare loss
Consequence for market outcomes
Consequence of Price Floor for stakeholders
Minimum Wages
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Minimum price that an employer must to pay to the labour
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Initially the labour market was at an equilibrium with wage We and quantity Qe. After the minimum wage is imposed on the labour market, it creates a disequilibrium / labour surplus (unemployment) at wage Wm, which at wage Wm the quantity supplied of labour is way higher than the quantity demanded of labour.
Effect on market outcome
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Labour Surplus & Unemployment
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Illegal workers that get paid at wages below minimum wage rate
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Misallocation of labour resource (allocative inefficiency)
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Misallocation in product market (productive inefficiency)
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Welfare loss
Consequence of Minimum Wages for the economy
Consequence of Price Floor for stakeholders
