1. Price Floors & Ceilings Government Price Controls Price Qty T-Shirts D1D1 S1S1 ------------------- P1P1 Q1Q1 E1E1

2. Price Qty T-Shirts D1D1 S1S1 ------------------- $11 1,000 E1E1 Drawing & Labeling S&D Graphs:

3. Gov’t Price Controls Government Price controls set a maximum or minimum price for a specific good or service –Price floors = minimum price & Price ceilings = maximum price Price controls often disrupt market equilibrium (E 1 ) –Usually lead to lower overall market efficiency –Often create shortages or surpluses of goods/services Price controls were used in the 1970’s but are rarely used in the U.S. economy today.

4. Federal Minimum Wage History 1980$3.10 1981$3.35 1990$3.80 1991$4.25 1996$4.75 1997$5.15 2007$5.85 2008$6.55 2009$7.25 minimum wage rates higher than the Federal minimum wage rates the same as the Federal No minimum wage law minimum wage rates lower than the Federal American Samoa has special minimum wage ratesspecial minimum wage rates California $8.00

5. Benefits Costs Raise the Federal Minimum Wage to $10 00/hr

6. Price Floor: MARIN & Min. Wage D1D1 S1S1 $9 50 E1E1 Price Floor. No Effect —(floor is below market equilibrium) $ 8 00 Marin Minimum wage is approx. 8 00 /hr Min. Wage Workers End Result: no change in price or quantity

7. Minimum Wage: Gov’t Imposed Price Floors D1D1 S1S1 $7 25 Q1Q1. Surplus of Supply Price Floor $10 00 Minimum wage rises: 7 25 /hr => 10 00 /hr Min. Wage Workers E1E1 ----------------------- QDQD QSQS End Result: Less Workers hired! (Q1 to QD) surplus of workers Qty D falls while Qty S rises Q1 to QD is a decrease in Quantity demanded

8. Price Floor Summary Price floors above market equilibrium cause a surplus of supply –The market shrinks! (less goods are sold!) –Qty Demanded falls but quantity supplied rises (Qs – Qd = surplus) Price floors below market equilibrium have no effect –They do not change market equilibrium

9. Benefits Costs Rent Control

10. Price Ceiling Continued…. D1D1 S1S1 $900 E1E1 Price Ceiling. No Effect —(Above Mkt. Equilibrium) $ 1000 Price Ceiling imposed of $1,000 3,000 Apartments

11. Rent Control: Price Ceiling D1D1 S1S1 $900 E1E1. Shortage of Supply Price Ceiling $ 700 Price Ceiling imposed of $700 3,000 Apartments ---------- QSQS QDQD Qty D rises but Qty S falls Result: Less apartments rented ! (3000 - Q S )

12. Gov’t Price Control Summary Price floors: (example: min. wage) –Above market equilibrium cause a surplus of supply The market shrinks! (less goods are sold!) Quantity supplied rises, quantity demanded falls –Below market equilibrium have no effect Price Ceilings: (example: rent control) –Below market equilibrium cause a shortage of supply The market shrinks (less goods are sold) Quantity demanded rises while quantity supplied falls –Above market equilibrium have no effect