This document discusses price controls and their impact on supply and demand. It provides examples of price ceilings, which establish a legal maximum price, and price floors, which set a legal minimum price. Price ceilings can cause shortages by creating a surplus of demand over supply. Price floors can result in surpluses or unemployment by producing a surplus of supply over demand. The effects are illustrated using supply and demand graphs for rental housing prices under a price ceiling and wages for unskilled labor under a minimum wage price floor.

1. Team :
Ajay Gulwani
Gagandeep Singh
Nikhil Jindal
Yogesh Singla
Anup Agarwal
Samir

2. SUPPLY, DEMAND, AND GOVERNMENT POLICIES
Price Controls measures :
Price Ceiling: a legal maximum on the price of a good or service.
Example: rent control.
Price Floor: a legal minimum on the price of a good or service.
Example: minimum wage.

3. SUPPLY, DEMAND, AND GOVERNMENT POLICIES
Equilibrium without price controls
P
Q
D
SRental price of
apartments
$800
300
Quantity of
apartments

4. SUPPLY, DEMAND, AND GOVERNMENT POLICIES
• Price ceiling above
the equilibrium price
is not binding –has
no effect on the
market outcome.
P
Q
D
S
$800
300
Price
Ceiling
$1000

5. SUPPLY, DEMAND, AND GOVERNMENT POLICIES
• The equilibrium price
($800) is above the
ceiling and therefore
illegal. The ceiling is a
binding constraint
on the price, causes a
shortage.
P
Q
D
S
$800
Price
Ceiling
$500
250 400
Shortage

6. SUPPLY, DEMAND, AND GOVERNMENT POLICIES
• In the long run, supply
and demand are more
price-elastic. Therefore,
the shortage will be
larger.
P
Q
D
S
$800
150
Price
Ceiling
$500
450
Shortage

7. SUPPLY, DEMAND, AND GOVERNMENT POLICIES
W
L
D
SWage paid to
unskilled workers
$4
500
Quantity of unskilled
workers
Equilibrium Price

8. SUPPLY, DEMAND, AND GOVERNMENT POLICIES
• A price floor below the
equilibrium price is not
binding – has no effect on the
market outcome.
W
L
D
S
$4
500
Price
floor
$3

9. SUPPLY, DEMAND, AND GOVERNMENT POLICIES
• The equilibrium wage ($4)
is below the floor and
therefore illegal. The floor is
a binding constraint
on the wage, causes a
surplus(i.e., unemployment).
W
L
D
S
$4
Price
Floor
$5
400 550
Labor
Surplus

10. SUPPLY, DEMAND, AND GOVERNMENT POLICIES
• Minimum wage laws
do not affect highly
skilled workers.
Often, they affect teen
workers.
W
L
D
S
$4
Minimum
Wage$5
400 550
Unemployment

11.  Laissez Faire/Free Market Economics
 Associated with capitalism
 Role of Government
 Equilibrium Level
 Price Controls
 Role of government
 Reasons for implementation
 Changes the Equilibrium Level

12. What is Price Floor?
Minimum prices set by government for a particular good or labor.
Pros
Higher Income for Producers
Higher Income for Labor
Cons
Higher Prices for consumers
Encourage oversupply and Ineffeciency
Higher Unemployment

13. What is Price ceiling ?
Maximum prices set by government for a particular good/service.
Pros
Affordability
Addresses to a wider section of the society
Cons
Lowers the Supply
Creates shortage
Emergence of Black Markets

14. • Price ceiling ineffectiveness on a Global level - During the peak or ceilings
prices of a product, a part of market does not abide to it. For ex, Year 2006,
Venezuela’s price ceilings on coffee reached a breaking point as the same
resulted in farmers hoarding the beans and been sold at loss at government
prices. Further, the same led to formation of black market in the capital city and
shortage.
• India – Pharmaceuticals companies product “Atorvastatin” for prevention
of ailment diseases, are sold from INR 9 per strip of 10 tabs to INR 90 per strip
of 10 (the price leader), even as the price of the public procurement agency,
Tamil Nadu Medical Services Corporation Ltd (TNMSC), is INR 2.13 per 10
tabs. The ceiling price would, therefore, be around INR 70-80 per 10 tablets
and that is still a high price when the bare cost for procurements is around INR
2 per 10 tablets.

15. • Indonesia – Airlines companies charged excess fares during the festival
season violating all norms by transportation ministry. Further led the
government to impose ceiling prices on all modes of transportation to prevent
soaring prices.

16. • US Minimum wage laws – Fixed salary or remuneration employers
are required to pay to employees.
• Price floors are often used in Agriculture sector in order to protect
the farmers.

17. Price Floor is the regulated lowest price set to benefit the poor.
Economy and its development - However, price control often interfere with
functioning of free economy and also the markets and many times becomes
hurdle to growth of the economy.
Production houses, middleman all are held responsible. However government
uses these economic tools with backdrop of political motive and welfare of part
section of the society.
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