Sometimes governments want to override the “invisible hand”, and control prices

Price Floor A legal minimum price

Price Ceiling A legal maximum price

3.4 Price Controls

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

Agricultural 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

Effects of Price Supports

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

Winners and Losers

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

Minimum Wage