U2; N6
Government-Set Prices
Artificial Prices and Their Effects on the Market
In most competitive markets, prices rise and fall freely due to the forces of supply and demand at work.
Occasionally, though, the equilibrium market price of certain goods and services is not affordable
enough for households with meager financial means. When this occurs, there is often significant
political pressure on the government to intervene on behalf of these households. In order to address
such issues, the government may institute price controls, which artificially set a legal price for a given
good or service.
Price Ceiling
A price ceiling is a legally established
maximum price that must fall below the
market equilibrium. This yields a market
shortage.
Equilibrium Price
Price Ceiling
QD
3
QS
ME
2.75
SHORTAGE
QS
Prices must STOP at the ceiling
and may not rise to the
equilibrium price.
QD
P
Q
Price Floor
A price floor is a legally established minimum
price that must fall above the market
equilibrium. This yields a market surplus.
QD
Price Floor
4
Equilibrium Price
3
SURPLUS
QS
ME
Prices must STOP at the floor
and may not fall to the
equilibrium price.
QS
P
Q
QD
Price Control
Graphing Practice
Complete the following: (1) for each scenario below, identify whether the price control is a ceiling or floor; (2)
identify whether the consequence is a shortage or surplus; (3) illustrate the consequence on the graph.
Supply & Demand Market for Gasoline
The market equilibrium gas price is $3.50
per gallon. After a recession sets in, the
federal government sets a price control on
gas at an even $3.00 per gallon in order to
help low-income families who struggle to
pay at the pump.
3.50
CEILING OR FLOOR
S
D
SHORTAGE OR SURPLUS
P
Q
Supply & Demand Market for Labor
The market equilibrium price for labor is
$7.25 per hour. The federal government
decides to institute a standard minimum
wage at $10.00 per hour to help close the
income gap.
7.25
CEILING OR FLOOR
S
D
SHORTAGE OR SURPLUS
P
Q
Supply & Demand Market for Housing
The market equilibrium price for real estate
in New York City is $800 per month. In an
effort to make housing more accessible to
low-income households, the city institutes
a policy of rent control, thereby setting rent
prices at no more than $600 per month.
800
CEILING OR FLOOR
S
D
P
Q
SHORTAGE OR SURPLUS
Q
Price Control
Graphing Practice Key
Complete the following: (1) for each scenario below, identify whether the price control is a ceiling or floor; (2)
identify whether the consequence is a shortage or surplus; (3) illustrate the consequence on the graph.
Supply & Demand Market for Gasoline
The market equilibrium gas price is $3.50
per gallon. After a recession sets in, the
federal government sets a price control on
gas at an even $3.00 per gallon in order to
help low-income families who struggle to
pay at the pump.
3.50
CEILING OR FLOOR
3.00
S
SHORTAGE
QD > QS
D
SHORTAGE OR SURPLUS
P
Q
Supply & Demand Market for Labor
SURPLUS
QS > QD
The market equilibrium price for labor is
$7.25 per hour. The federal government
decides to institute a standard minimum
wage at $10.00 per hour to help close the
income gap.
10.00
7.25
CEILING OR FLOOR
S
D
SHORTAGE OR SURPLUS
P
Q
Supply & Demand Market for Housing
The market equilibrium price for real estate
in New York City is $800 per month. In an
effort to make housing more accessible to
low-income households, the city institutes
a policy of rent control, thereby setting rent
prices at no more than $600 per month.
800
CEILING OR FLOOR
600
S
P
Q
SHORTAGE
QD > QS
D
SHORTAGE OR SURPLUS