Applications of Demand and Supply
4.2 Government Intervention in Market Prices: Price Floors and Price Ceilings
- Use the model of demand and supply to explain what happens when the government imposes price floors or price ceilings.
- Discuss the reasons why governments sometimes choose to control prices and the consequences of price control policies.
So far in this chapter and in the previous chapter, we have learned that markets tend to move toward their equilibrium prices and quantities. Surpluses and shortages of goods are short-lived as prices adjust to equate quantity demanded with quantity supplied.
In some markets, however, governments have been called on by groups of citizens to intervene to keep prices of certain items higher or lower than what would result from the market finding its own equilibrium price. In this section we will examine agricultural markets and apartment rental markets - two markets that have often been subject to price controls. Through these examples, we will identify the effects of controlling prices. In each case, we will look at reasons why governments have chosen to control prices in these markets and the consequences of these policies.