What do you think?: Should we increase minimum wage? CIE3M Price Controls

What do you think?: Should we increase minimum wage?

CIE3MPrice Controls

Price Controls•What are they?

Government policies that attempt to hold the price of certain goods/services at a disequilibrium value

•But why would the government do that?!The government imposes these policies for specific reasons in each case, usually to help a disadvantaged group or society as a whole

Disequilibrium Prices

•When forces hold a price at some disequilibrium value... ▫what determines the quantity actually

traded on the market?

Types of Price Controls

Price Floors Price Ceilings

Price Floors

•The minimum price that can be charged for a particular good/service▫Government may think the price is too low,

may want to assist producers

•Only binding/effective when set above the equilibrium price

Price Floors

•Draw a graph at equilibrium, then draw a price floor above this equilibrium

•What is the effect on the market?

Price Floors

•Effect:•Leads to excess supply (a surplus) in

the market

•Often the government will buy this excess supply from producers▫The government might stockpile the goods▫Destroy the goods▫Sell or give it away to other countries

Example: Labour Market

•Minimum Wage rate is considered a price floor▫ government imposed minimum price that must

be paid for labour

•When the rate increases (above equilibrium)▫it will cause excess supply of labour (people

want to work)▫but many employers will not hire more workers

•When there is excess supply in the labour market this generates unemployment

Price Ceilings

•The maximum price that can be charged for a particular good/service▫Government may want to lower a price, or

restrict production

•Only binding/effective when set below the equilibrium price

Price Ceilings

•Draw a graph at equilibrium, then draw a price ceiling below this equilibrium

•What is the effect on the market?

Price Ceilings• Effect:• Leads to excess demand (a shortage) in

the market

• Often consumers will wait in lines to get items of high demand and low supply

• Some producers may pick and choose who they sell the scarce goods to (sellers’ preferences)

• The government may choose to ration goods (method often used during world wars)

Price Ceilings •May also lead to: Black Markets

▫Goods are sold illegally at higher prices

▫Profit can be made by selling in the black market

•Emergence of black markets causes problems with the government’s intentions

Price Ceiling: Example

•Rent Controls•Government imposes a maximum price

that landlords can charge•Idea is to protect vulnerable groups

looking for affordable housing

▫Since a price ceiling causes excess demand, what does this mean for housing?

Price Ceiling: Example

•Sports team Salary Caps▫A maximum each team can spend to pay all

of its players•Why would the NHL implement a team

salary cap?▫Disperse the highly paid players to many

teams▫Teams unable to stockpile talent

Buffer Stock Schemes

•An organization (usually run by producers or the government) that

•attempts to smooth out fluctuations in prices & producer incomes

•by the purchase and sale of stocks of particular goods

Buffer Stock Manager

•Buys and sells in the market to manipulate demand and supply to stabilize prices

Example

Practice

•ACTIVITY 28 – Farm Price Supports

Price Ceilings and Floors Practice

•Set of Practice Questions

•Minimum Wage & Rent Control Questions