Price Controls

Question 1

PRICE CONTROLS

Answer 1

• government regulation establishing a maximum
price to be charged for specified goods and
services, especially during periods of war or
inflation.
• The price maybe fixed at a level below the market
equilibrium price or above it.

Question 2

• Price controls are classified into two types:

Answer 2

1. floor price; and,

2. ceiling price

Question 3

Price Floor

Answer 3

A price floor is the lowest legal price
a commodity can be sold at. Price
floors are used by the government to
prevent prices from being too low.

Question 4

Common Example of Price Floor

Answer 4

◉ The most common price floor is the
minimum wage--the minimum price
that can be payed for labor. Price
floors are also used often in
agriculture to try to protect farmers.

Question 5

Price Floor Where

Answer 5

◉ Price floor must be set above the

equilibrium price to be effective.

Question 6

Two outcomes are possible when th

government imposes a price floor:

Answer 6

1. If the price floor is lower than the
equilibrium price, it is not binding
and has no effect on the price or
quantity sold.
2. If the price floor is higher than the
equilibrium price, the floor is a
binding constraint and a surplus is
created.

Question 7

Government intervention to prevent prices

to go beyond equilibrium:

Answer 7

• buy up all the surplus.
• strictly enforce the price
floor and let the surplus go
to waste
• control how much is
produced
• subsidize consumption.

Question 8

Price Ceiling

Answer 8

is a situation when
the price charged is more than or
less than the equilibrium price
determined by market forces of
demand and supply. It has been
found that higher price

Question 9

Effect of price ceiling

Answer 9

◉ Shortage
◉ Government rationing and queuing
◉ Black market
◉ Degradation of quality