1. Supply, Demand and Government Policies
Chapter 6
Copyright © 2001 by Harcourt, Inc. All rights reserved.   Requests for permission to make copies of any part of the work should be mailed to:
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2. Price Controls...
Are usually enacted when policymakers believe the market price is unfair to buyers or sellers.
Result in government-created price ceilings and floors. 3 3

3. Price Ceilings & Price Floors
A legally established maximum price at which a good can be sold. A binding price ceiling will be set below the equilibrium price.
Price Floor
A legally established minimum price at which a good can be sold. A binding price floor will be set above the equilibrium price. 4 4

4. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.
A Price Ceiling That Is Binding... The price ceiling is binding if set below the equilibrium price, leading to a shortage.
Price of
Ice-Cream
Cone
Supply
Equilibrium
price $3 2
Price
ceiling 75
Quantity
supplied
125
Quantity
demanded
Shortage
Demand
Quantity of
Ice-Cream
Cones 7 10

5. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.
A Price Floor That Is Binding... The price floor is binding if set above the equilibrium price.
Price of
Ice-Cream
Cone
Supply
Surplus $4
Price floor 80
Quantity
demanded
120
Quantity
supplied $3
Equilibrium
price
Demand
Quantity of
Ice-Cream
Cones 8 17