3.4 Price Controls
 Sometimes governments want to override the “invisible hand”,
and control prices
 Price Floor
 A legal minimum price
 Price Ceiling
 A legal maximum price
Agricultural Price Supports
 Farmers face product prices that fluctuate widely
 Products like milk and wheat are necessities, so have inelastic
demand curves (especially in the short run)
 A decrease in the supply of wheat, due to unfavorable weather
leads to a fairly small decrease in the equilibrium quantity but a
considerable rise in price
Effects of Price Supports
 If equilibrium price of rice is
considered too low, the
government agency imposes a
price floor. This creates a rice
surplus at the points along the
price floor.
 The government agency
purchases the surplus, which
is Q2 – Q1
Winners and Losers
 Farmers are winners of price supports, since their revenues
increase
 Consumers lose because of the higher prices they pay
 Taxpayers also lose because they have to pay for the
government agency’s purchases of surplus products
Minimum Wage
 Another example of price supports is minimum wage
 Minimum wage exhibits a downward-sloping demand curve and
an upward-sloping supply curve
 Downward Demand curve: as employers demand labour at
higher wage rates, they cut back on the number of workers
 Upward Supply curve: higher wage rates make people want to
offer their labour in the market