1. Government Intervention

2. Why would the government step in to control the prices of goods and services? Would economists think that controlling prices is good idea?

3. Causes
The government wants to protect groups that have a hard time dealing with price increases.
Keep prices higher or lower than what would be equilibrium.

4. EFFECT Disruption of the market Distort the allocation of resources
Does not work.
Can work if used for a short period of time.

5. PRICE CEILING: (Creates a Shortage)
A MAXIMUM price set by the government that consumers are required to pay for a good or service.
Prevents prices from getting too high, enabling consumers to buy essential goods or services they wouldn’t be able to afford at the equilibrium price
Example: Rent control

6. Persistent Shortage Demand will increase as price decreases
Result – suppliers don’t want to produce more b/c they can’t set their own prices.

7. PRICE CEILING
Price Ceiling Qs Qd
SHORTAGE

8. PRICE FLOOR: (Creates a Surplus)
A MINIMUM price set by the government that consumers are required to pay for a good or service.
Pushes price up, ensuring that producers receive a benefit for providing a good or service
Example: Minimum wage

9. Persistent surplus
Because price is above equilibrium (law of Demand) tells us that we demand less as price goes up
Result: Sell at low prices or government buys the surplus

10. PRICE FLOOR
Price Floor Qd Qs
Surplus