Module 8 Supply and Demand Price Controls Ceilings

Module 8 Supply and Demand: Price Controls (Ceilings and Floors) KRUGMAN'S MACROECONOMICS for AP* Margaret Ray and David Anderson

What you will learn in this Module: • The meaning of price controls, one way government intervenes in markets • How price controls can create problems and make a market inefficient • Why economists are often deeply skeptical of attempts to intervene in markets • Who benefits and who loses from price controls, and why they are used despite their well-known problems

Why Governments Control Prices • Unpopular market prices • Political pressure

Price Ceilings • Legal maximum price • Examples • Resource prices during WWII • Oil Prices in 1970 s • California electricity • New York City apartments

Modeling a Price Ceiling

How a Price Ceiling Causes Inefficiency • Inefficient Allocation to Consumers • Wasted Resources • Inefficiently Low Quality • Black Markets

So Why Are There Price Ceilings? • Benefit some • Uncertainty • Lack of understanding

Price Floors • Legal minimum price • Examples • Agricultural products • Minimum wage • Trucking • Air travel

Modeling a Price Floor

How a Price Floor Causes Inefficiency • Inefficiently Low Quantity • Inefficient Allocation of Sales Among Sellers • Wasted Resources • Inefficiently High Quality • Illegal Activity

So Why Are There Price Floors? • Benefit some • Disregard • Lack of understanding