Government Imposed Price Controls The government should make gas cheaper and minimum wage higher!

Most prices in the United States are set by the market  Supply and demand determine price  Decision making is decentralized— they are made by individuals and businesses

 In Competitive Markets:  Buyers compete with other buyers  Sellers compete with other sellers  Everyone who is willing and able to buy at the market price gets the product  Everyone who is willing and able to sell at that price can sell it

Perfect Right? Not to everyone

Price Control  Sometimes lobbyists for producers can convince government officials that market prices are too low

Is Minimum Wage Too Low? This is a generic budget that McDonald’s designed for its adult workers. Write down your thoughts about living on this budget. Could you do it? Is it missing anything that you need? PROBLEMS? Assumes one full-time and one part- time job! What about food? What about health insurance? (typically $200) What about gasoline? (typically $250) What about clothes? What about childcare?

What if Prices Are Too Low?  A price floor is a legally enforced minimum price for a product  Price floors are set above the equilibrium price EOC study guide Supply & Demand #8

Price Floor: Minimum Wage  Graph this:  The equilibrium price of wages is $7.25 an hour  The government raises minimum wage to $10.10 an hour  What happens?

Price Floor  What market condition does a price floor create? Surplus

Price Control  Sometimes lobbyists for consumers can convince government officials that market prices are too high

When Prices are Too High  A price ceiling is the legally enforced maximum price that can be charged for a good or a service  Price ceilings are below the equilibrium price EOC study guide Supply & Demand #9

Price Ceiling: Gas  Graph this:  Equilibrium quantity of gas 10 million gallons per week  Equilibrium price is $2.50  The price ceiling for gas is $1.50  What is the result?

Price Ceiling Cont.  What market condition does a price ceiling create? Shortage  Why? Because the price is set below the equilibrium, thus there is more demand and less supply

Price Ceilings  There are not many examples of price ceilings in the U.S. today  Rent control is used in some major cities to keep rent low  Can be imposed during crises; wars, harvest failures, and natural disasters to stop sky-rocketing prices

“We economists don't know much, but we do know how to create a shortage. If you want to create a shortage of tomatoes, for example, just pass a law that retailers can't sell tomatoes for more than two cents per pound. Instantly you'll have a tomato shortage. It's the same with oil or gas.”  Milton Friedman

If They Create Shortages and Surpluses, Then Why Do They Become Laws?  They sound like a good idea to the public  Politicians want to keep their constituents happy  Special interest groups push for them