October 4&5, 2011

 The setting of prices (usually by the government) so that prices can not adjust to the equilibrium level that was determined by demand and supply  Result in market disequilibrium, and therefore in shortages or surpluses

 Legal maximum price  Consequences: ◦ Shortages ◦ Smaller quantity supplied and sold ◦ Underallocation of resources to the good; failure to achieve allocative efficiency ◦ Non-price rationing ◦ Underground (informal) markets  Examples: ◦ Rent control ◦ Command economies ◦ Gas prices

 Legal minimum price  Consequences: ◦ Surpluses ◦ Smaller quantity demanded and purchased ◦ Firm inefficiency ◦ Overallocation of resources to the good ◦ Illegal sales at prices below the floor  Examples: ◦ Minimum wages ◦ Price floors for agriculture

Price Floor Price Ceiling Quantity < Equilibrium Secondary Market Lost economic surplus Surplus Overallocation of resources to the market Inefficiency Shortages Underallocation of resources to the market Non-price rationing

Fixed Prices  Usually ticket prices  Organizing body fixes prices  Vertical supply curve Commodity agreements  Occur in the primary sector  Attempt to stabilize prices and protect against fluctuations

Q P S D PfPf Shortage PePe Price Fixing - Shortage

Q P SD PePe Surplus PfPf Price Fixing - Surplus

 A type of Commodity Agreement  Set a price between the typical extremes  When supply is low (price high), government price is below equilibrium  resulting shortage is offset by government selling its own supplies at the lower price  When supply is high (price low), government price is above equilibrium  resulting surplus is offset by government buying up the surplus