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By the end of this section, you will be able to:

  • Explain price controls, price ceilings, and price floors
  • Analyze demand and supply as a social adjustment mechanism

Controversy sometimes surrounds the prices and quantities established by demand and supply, especially for products that are considered necessities. In some cases, discontent over prices turns into public pressure on politicians, who may then pass legislation to prevent a certain price from climbing “too high” or falling “too low.”

The demand and supply model shows how people and firms will react to the incentives provided by these laws to control prices, in ways that will often lead to undesirable consequences. Alternative policy tools can often achieve the desired goals of price control laws, while avoiding at least some of their costs and tradeoffs.

Price ceilings

Laws that government enacts to regulate prices are called Price controls . Price controls come in two flavors. A price ceiling    keeps a price from rising above a certain level (the “ceiling”), while a price floor    keeps a price from falling below a certain level (the “floor”). This section uses the demand and supply framework to analyze price ceilings. The next section discusses price floors.

In many markets for goods and services, demanders outnumber suppliers. Consumers, who are also potential voters, sometimes unite behind a political proposal to hold down a certain price. In some cities, such as Albany, renters have pressed political leaders to pass rent control laws, a price ceiling that usually works by stating that rents can be raised by only a certain maximum percentage each year.

Rent control becomes a politically hot topic when rents begin to rise rapidly. Everyone needs an affordable place to live. Perhaps a change in tastes makes a certain suburb or town a more popular place to live. Perhaps locally-based businesses expand, bringing higher incomes and more people into the area. Changes of this sort can cause a change in the demand for rental housing, as [link] illustrates. The original equilibrium (E 0 ) lies at the intersection of supply curve S 0 and demand curve D 0 , corresponding to an equilibrium price of $500 and an equilibrium quantity of 15,000 units of rental housing. The effect of greater income or a change in tastes is to shift the demand curve for rental housing to the right, as shown by the data in [link] and the shift from D 0 to D 1 on the graph. In this market, at the new equilibrium E 1 , the price of a rental unit would rise to $600 and the equilibrium quantity would increase to 17,000 units.

A price ceiling example—rent control

The graph shows a shift in demand with a price ceiling.
The original intersection of demand and supply occurs at E 0 . If demand shifts from D 0 to D 1 , the new equilibrium would be at E 1 —unless a price ceiling prevents the price from rising. If the price is not permitted to rise, the quantity supplied remains at 15,000. However, after the change in demand, the quantity demanded rises to 19,000, resulting in a shortage.
Rent control
Price Original Quantity Supplied Original Quantity Demanded New Quantity Demanded
$400 12,000 18,000 23,000
$500 15,000 15,000 19,000
$600 17,000 13,000 17,000
$700 19,000 11,000 15,000
$800 20,000 10,000 14,000

Questions & Answers

how can chip be made from sand
Eke Reply
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Almas
are nano particles real
Missy Reply
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Joseph
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Lale Reply
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William
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nanopartical of organic/inorganic / physical chemistry , pdf / thesis / review
Ali
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Maira Reply
There are lots of products of nano chemistry... Like nano coatings.....carbon fiber.. And lots of others..
learn
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Google
da
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Bhagvanji
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Giriraj
Preparation and Applications of Nanomaterial for Drug Delivery
Hafiz Reply
revolt
da
Application of nanotechnology in medicine
has a lot of application modern world
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yes
narayan
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Bhagvanji
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Crow Reply
what about nanotechnology for water purification
RAW Reply
please someone correct me if I'm wrong but I think one can use nanoparticles, specially silver nanoparticles for water treatment.
Damian
yes that's correct
Professor
I think
Professor
Nasa has use it in the 60's, copper as water purification in the moon travel.
Alexandre
nanocopper obvius
Alexandre
what is the stm
Brian Reply
is there industrial application of fullrenes. What is the method to prepare fullrene on large scale.?
Rafiq
industrial application...? mmm I think on the medical side as drug carrier, but you should go deeper on your research, I may be wrong
Damian
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LITNING Reply
what is a peer
LITNING Reply
What is meant by 'nano scale'?
LITNING Reply
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LITNING
scanning tunneling microscope
Sahil
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Santosh
Do u think that Graphene and Fullrene fiber can be used to make Air Plane body structure the lightest and strongest. Rafiq
Rafiq
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Mahi
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Rafiq
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Anam
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Anam
Any one who tell me about Preparation and application of Nanomaterial for drug Delivery
Hafiz
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Bob Reply
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Bob
The nanotechnology is as new science, to scale nanometric
brayan
nanotechnology is the study, desing, synthesis, manipulation and application of materials and functional systems through control of matter at nanoscale
Damian
Equilibrium price is a stable price and it must stay.discuss
Elvis Reply
Card 14 / 21: What are the similarities between a consumer’s budget constraint and society’s production possibilities frontier, not just graphically but analytically?
Ali Reply

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Source:  OpenStax, Principles of macroeconomics for ap® courses. OpenStax CNX. Aug 24, 2015 Download for free at http://legacy.cnx.org/content/col11864/1.2
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