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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

The equation for a demand curve is P = 48 – 3Q. What is the elasticity in moving from a quantity of 5 to a quantity of 6?
Abdul Reply
Difference between demand and supply
Amuzu Reply
The quantity that is demanded will be the amount of that product that people are willing to purchase at a certain price; the relationship between quantity demanded and the price is called the demand relationship. Whereas, Supply does represent how much the whole market can offer a certain product or
Rahul
What is resource maintenance
Linda Reply
it is the optimum and continous supply of resources to undertake a task whether manufacturing or service.
Sajad
RM emphasizes a team approach to human error reduction using principles that seek to improve communications, situational awareness, problem solving, decision making, and teamwork by making the availability of facilities,of funding , personnel, spare parts , technical data, test equipments, and tools
Deep
why economics is a social science
Madag Reply
Economics is generally regarded as a social science, which revolves around the relationships between individuals and societies
Rahul
what is planned demand and actual demand?
Jincy
The terms demand planning and demand forecasting are often used interchangeably. Though they are unmistakably linked in the supply chain management process, they are not the same thing. ... Demand planning is a process; accurate forecasts are the results of an effective demand planning process
Rahul
economics projection on how the cost of living , the facilities that can be enhanced or acquired can be utilised and maintained best. How change in demand and supply effect actual social strata and economic earning. the science in economics is the allied application to make society a welfare state
Srikumar
what is repo rate ?
Ankit
Demand planning and sales forecasting is one of the key aspects of manufacturing operations. This is because manufacturing operations need to accurately estimate demand in order to produce the correct amount of goods within a given time
Deep
what is opportunity cost
Linda Reply
opportunity cost, or alternative cost, is the loss of potential gain from other alternatives when one particular alternative is chosen over the others. In simple terms, opportunity cost is the loss of the benefit that could have been enjoyed had a given choice not been made. 
Rahul
when the difference in output to input is either >1 or enhancement of resources are done to rationalise utility we forego a process to maximize on next best opportunity which will be effective change in cost than can be overcome or foregone to get the best result
Srikumar
Thank you
Linda
what is quantity demanded
Oke Reply
Quantity demanded is the quantity of a commodity that people are willing to buy at a particular price at a particular point of time.
Tendai
ok
Duy
what is rational behavior
Kpienta Reply
This is a part of decision making practice wherein an individual/company exercises sensible choice making, which provides him with the optimum amount of benefit.
Sajad
consumer is said to be rational if he or she buys goods which gives maximum satisfaction at a lower price
Duk
defination of perfect Competition
Fatima Reply
is a type of market form in which their are many companies that sell the same products and service
Modou
current economic plans (MDGS) needs
Ajijola Reply
I don't know what is happening
surajkumar
What is economic
Joeali Reply
What is the importance of study economics
Wilma
Economic is the study of how humans make decisions in face of sacristy
Wilma
economics is the study of how humans makes decision in the face of scarcity
Kpienta
economics is the study of human behaviour when faced with difficult situation example when goods and services are scarcity.
Sydney
Economic is the study of human behaviour
Chibuzo
what is Economic
Dauda Reply
what is 4ps of economic?
thomas Reply
production place Price product
Benedict
Criticism of elasticity
Siddikur Reply
what is unemployment
Gyamfi Reply
ohk thanks
Gyamfi
why is unemployment rapid in the country
Gyamfi
I need more explanation
Odo
1st-due to poorly government planning on employment opportunities, 2nd-low level of science and technology can leads to unemployment,3rd education level
Isack
fiscal monitory policy
Abubakar
thi can be said to be,the level of joblessness in an economy.
Omar
I mean "this "
Omar
what is unemployment
Munanag Reply
not working
Bethel
some one who is willing qualified to work but can't find job
jackie
Bethel...explain? please
Abubakar
some one who is willing to work but can't find job
Hawa
Yes true
Brian
which one please
Hawa
unemployment refers to the ability for someone who is capable and willing to work but could not find a job..
Mnoko
some one who not able to find a job
Dennis
please what is the secret of learning?
thomas

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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