Transcript Price Controls

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 $12.50)
MINIMUM PRICE (FLOOR PRICE)
Sometimes a minimum price is set in a market above the equilibrium as it is seen as
being unfair to the suppliers in that particular market.
In a market where there are a combination of very high and very low prices, a
minimum price may be set which it cannot fall below.
This price must be above equilibrium to be effective.
Price
S
($)
Minimum price
Pe
D
Qd
Qe
surplus
Qs
Quantity (units)
As a result of the new minimum price (above equilibrium) a surplus has now been created.
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.
Price
S
($)
Pe
Maximum price
D
Qs
Qe
shortage
Qd
Quantity (units)
As a result of the new maximum price (below equilibrium) a shortage has now been created.
DIRECT TAXES
Tax on income and earnings. E.g. Income tax.
If direct taxes are increased this will reduce people’s disposable income
shifting the demand curve to the left.
Price
($)
S
P1
P2
D1
D2
Q2 Q1
Quantity (units)
INDIRECT TAXES
A tax on consumption or spending. E.g. GST.
An indirect tax will affect the supply curve
S2
Price
($)
S1
P2
P1
D
Q2
Q1
Quantity (units)
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.
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 (tax=$20, (70 -50) NOT $10).
Price
($)
S1
S2
The amount
of the tax.
70
60
50
D
40 45 Quantity (units)
SUBSIDIES
= payment to producers from government in order to reduce costs of
production.
A subsidy has the opposite effect of an indirect tax…it moves the supply
curve DOWN vertically.
NOTE: The
$2 subsidy
has caused
the price to
fall from $12
to $11.
Price
($)
S1
S2
12
11
10
D
100 120
Quantity (units)