Government Price Controls Price Floors Ceilings Price TShirts

Government Price Controls Price Floors & Ceilings Price T-Shirts S 1 ---------- P 1 ---------- E 1 Q 1 D 1 Qty

Drawing & Labeling S&D Graphs: Price T-Shirts S 1 ---------- $11 ---------- E 1 1, 000 D 1 Qty

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.

Federal Minimum Wage History 1980 1981 1990 1991 1996 1997 2008 2009 $3. 10 $3. 35 $3. 80 $4. 25 $4. 75 $5. 15 $5. 85 $6. 55 $7. 25 California $10. 00 minimum wage rates higher than the Federal minimum wage rates the same as the Federal No minimum wage law American Samoa has special minimum wage rates lower than the Federal

Raise the Federal Minimum Wage to $1000/hr Benefits Costs

Price Floor: MARIN & Min. Wage Marin Minimum wage is approx. 800/hr Min. Wage Workers S 1 $950 . End Result: no change in price or quantity E 1 Price Floor $800 No Effect—(floor is below market equilibrium) D 1

Minimum Wage: Gov’t Imposed Price Floors Minimum wage rises: 725/hr => 1000/hr Min. Wage Workers Surplus of Supply Q 1 to QD is a decrease in Quantity demanded ------------ $725 QD . Q 1 Price Floor E 1 ------------ $1000 S 1 QS End Result: Less Workers hired! (Q 1 to QD) surplus of workers Qty D falls while Qty S rises D 1

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

Rent Control Benefits Costs

Price Ceiling Continued…. Price Ceiling imposed of $1, 000 Apartments No Effect—(Above Mkt. Equilibrium) $1000 $900 . S 1 Price Ceiling E 1 D 1 3, 000

Rent Control: Price Ceiling imposed of $700 Apartments S 1 . $900 E 1 Price Ceiling ---------- $700 Qty D rises but Qty S falls Result: Less apartments rented! (3000 - QS) Shortage of Supply QS 3, 000 QD D 1

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