 Sometimes governments want to override the “invisible hand”, and control prices  Price Floor  A legal minimum price  Price Ceiling  A legal maximum price 3.4 Price Controls

 Farmers face product prices that fluctuate widely  Products like milk and wheat are necessities, so have inelastic demand curves (especially in the short run)  A decrease in the supply of wheat, due to unfavorable weather leads to a fairly small decrease in the equilibrium quantity but a considerable rise in price Agricultural Price Supports

 If equilibrium price of rice is considered too low, the government agency imposes a price floor. This creates a rice surplus at the points along the price floor.  The government agency purchases the surplus, which is Q2 – Q1 Effects of Price Supports

 Farmers are winners of price supports, since their revenues increase  Consumers lose because of the higher prices they pay  Taxpayers also lose because they have to pay for the government agency’s purchases of surplus products Winners and Losers

 Another example of price supports is minimum wage  Minimum wage exhibits a downward-sloping demand curve and an upward-sloping supply curve  Downward Demand curve: as employers demand labour at higher wage rates, they cut back on the number of workers  Upward Supply curve: higher wage rates make people want to offer their labour in the market Minimum Wage