Supply, Demand and Government Policies Chapter 6 Copyright © 2001 by Harcourt, Inc. All rights reserved. Requests for permission to make copies of any part of the work should be mailed to: Permissions Department, Harcourt College Publishers, 6277 Sea Harbor Drive, Orlando, Florida

Price Controls... u Are usually enacted when policymakers believe the market price is unfair to buyers or sellers. u Result in government-created price ceilings and floors.

Price Ceilings & Price Floors Price Ceiling uA legally established maximum price at which a good can be sold. A binding price ceiling will be set below the equilibrium price. Price Floor uA legally established minimum price at which a good can be sold. A binding price floor will be set above the equilibrium price.

A Price Ceiling That Is Binding... The price ceiling is binding if set below the equilibrium price, leading to a shortage. $3 Quantity of Ice-Cream Cones 0 Price of Ice-Cream Cone 2 Demand Supply Equilibrium price Price ceiling Shortage 125 Quantity demanded 75 Quantity supplied Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.

A Price Floor That Is Binding... The price floor is binding if set above the equilibrium price. $3 Quantity of Ice-Cream Cones 0 Price of Ice-Cream Cone Equilibrium price Demand Supply Price floor$4 120 Quantity supplied 80 Quantity demanded Surplus Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.