What are price controls?

The Economy can be left to its own device, letting demand and supply be defined by free markets, or the government can intervene and set price controls. The whole idea is to limit the maximum and minimum prices charged to the consumer.

There are two prices controls:

1. Price Ceiling – When prices cannot go above a certain price. For example market rent control.

2. Price Floor -When prices cannot go below a certain price. For example minimum wage.

PRICE CEILING

A price ceiling is an horizontal line placed below the Equilibrium, this is because you can see from the suppliers perspective, they are willing to supply at a higher price, so they are capped. This creates a deadweight loss, where supplier surplus is impaired and consumer surplus is increased.

PRICE FLOOR

A price floor is an horizontal line placed above the Equilibrium level, limiting the minimum wage that firms were willing to pay to workers. This effectively creates a deadweight loss, reducing consumer surplus. The consumer in this case would be the firms hiring workers. They are stuck to paying more, so they hire less people.