1. © 2012 McGraw-Hill Ryerson Limited
LO3
Price Controls
Price Controls government regulations to set either a maximum or minimum price for a product Price Ceiling a government regulation stipulating the maximum price that can be charged for a product Price Floor a government regulation stipulating the minimum price that can be charged for a product
© 2012 McGraw-Hill Ryerson Limited

2. © 2012 McGraw-Hill Ryerson Limited
LO3
Price Ceiling
Used when present market price for a particular product is considered too high for many buyers
The product is felt to be a necessity
Example: rent control
© 2012 McGraw-Hill Ryerson Limited

3. © 2012 McGraw-Hill Ryerson Limited
LO3
Price Ceiling
Price ceilings cause shortages
© 2012 McGraw-Hill Ryerson Limited

4. © 2012 McGraw-Hill Ryerson Limited
LO3
Allocating Shortages
The market (supply and demand)
First come, first served
Producers’ preferences
Rationing
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5. LO3
Self-Test
a) Suppose the government introduces a price ceiling that is 20 cents different from the present equilibrium price. Would the result be a surplus or a shortage? Of what quantity?
If an illegal market were to develop, what would be the maximum illegal market price?
© 2012 McGraw-Hill Ryerson Limited

6. © 2012 McGraw-Hill Ryerson Limited
LO3
Quota
A quota, or restricting output, can raise price without causing a surplus
© 2012 McGraw-Hill Ryerson Limited

7. LO3
Self-Test
a) In equilibrium, what is the total revenue received by producers?
b) Suppose that government imposes a price floor of $4 per kilo. What quantity will be demanded? What quantity will farmers produce? What quantity will government buy?
How much will it cost to buy the surplus?
© 2012 McGraw-Hill Ryerson Limited