Price Controls

1
Price Controls

• The price is not free to automatically move back
  to equilibrium

2
Government Intervention

• Sometimes the government will intervene in a
  market to determine the price as the outcome
  could be seen as unfair (to consumers- too high,
  or producers- too low).
• E.g. Minimum wage (currently at 12.50)

3
Minimum Price (floor price)

• Sometimes a minimum price is set in a market
  above the equilibrium as it is seen as being
  unfair to the suppliers in that particular
  market.
• In a market where there are a combination of very
  high and very low prices, a minimum price may be
  set which it cannot fall below.
• This price must be above equilibrium to be
  effective.

4
Price ()
S
Minimum price
Pe
D
Qe
Qs
Quantity (units)
Qd
surplus
5

• As a result of the new minimum price (above
  equilibrium) a surplus has now been created.

6
Maximum Price (Ceiling price)

• Maximum prices are used to protect our consumers
  from having to pay ridiculously high prices for
  certain goods and services.
• A maximum price will be set below equilibrium,
  otherwise it will not be effective.

7
Price ()
S
Pe
Maximum price
D
Qe
Qd
Quantity (units)
Qs
shortage
8

• As a result of the new maximum price (below
  equilibrium) a shortage has now been created.

9
Taxes and Subsidies
10
Direct taxes

• Tax on income and earnings. E.g. Income tax.
• If direct taxes are increased this will reduce
  peoples disposable income shifting the demand
  curve to the left.

Price ()
S
P1
P2
D1
D2
Q2
Q1
Quantity (units)
11
Indirect taxes

• A tax on consumption or spending. E.g. GST.
• An indirect tax will affect the supply curve
• Remember that GST is added on top of the price
  the seller will receive therefore will shift the
  supply curve UP (vertically) to reach this new
  price.

S2
Price ()
S1
P2
P1
D
Quantity (units)
Q1
Q2
12

• At the new price the difference between the
  original and new supply curves should reflect the
  tax, not the difference between the original and
  new equilibrium points (tax20, (70 -50) NOT
  10).

S1
Price ()
S2
The amount of the tax.
70 60 50
D
Quantity (units)
40 45
13
Subsidies

• payment to producers from government in order
  to reduce costs of production.
• A subsidy has the opposite effect of an indirect
  taxit moves the supply curve DOWN vertically.

Price ()
S1
S2
NOTE The 2 subsidy has caused the price to fall
from 12 to 11.
12 11 10
D
Quantity (units)
100 120