what do you think?: should we increase minimum wage? cie3m price controls
TRANSCRIPT
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What do you think?: Should we increase minimum wage?
CIE3MPrice Controls
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Price Controls•What are they?
Government policies that attempt to hold the price of certain goods/services at a disequilibrium value
•But why would the government do that?!The government imposes these policies for specific reasons in each case, usually to help a disadvantaged group or society as a whole
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Disequilibrium Prices
•When forces hold a price at some disequilibrium value... ▫what determines the quantity actually
traded on the market?
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Types of Price Controls
Price Floors Price Ceilings
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Price Floors
•The minimum price that can be charged for a particular good/service▫Government may think the price is too low,
may want to assist producers
•Only binding/effective when set above the equilibrium price
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Price Floors
•Draw a graph at equilibrium, then draw a price floor above this equilibrium
•What is the effect on the market?
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Price Floors
•Effect:•Leads to excess supply (a surplus) in
the market
•Often the government will buy this excess supply from producers▫The government might stockpile the goods▫Destroy the goods▫Sell or give it away to other countries
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Example: Labour Market
•Minimum Wage rate is considered a price floor▫ government imposed minimum price that must
be paid for labour
•When the rate increases (above equilibrium)▫it will cause excess supply of labour (people
want to work)▫but many employers will not hire more workers
•When there is excess supply in the labour market this generates unemployment
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Price Ceilings
•The maximum price that can be charged for a particular good/service▫Government may want to lower a price, or
restrict production
•Only binding/effective when set below the equilibrium price
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Price Ceilings
•Draw a graph at equilibrium, then draw a price ceiling below this equilibrium
•What is the effect on the market?
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Price Ceilings• Effect:• Leads to excess demand (a shortage) in
the market
• Often consumers will wait in lines to get items of high demand and low supply
• Some producers may pick and choose who they sell the scarce goods to (sellers’ preferences)
• The government may choose to ration goods (method often used during world wars)
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Price Ceilings •May also lead to: Black Markets
▫Goods are sold illegally at higher prices
▫Profit can be made by selling in the black market
•Emergence of black markets causes problems with the government’s intentions
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Price Ceiling: Example
•Rent Controls•Government imposes a maximum price
that landlords can charge•Idea is to protect vulnerable groups
looking for affordable housing
▫Since a price ceiling causes excess demand, what does this mean for housing?
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Price Ceiling: Example
•Sports team Salary Caps▫A maximum each team can spend to pay all
of its players•Why would the NHL implement a team
salary cap?▫Disperse the highly paid players to many
teams▫Teams unable to stockpile talent
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Buffer Stock Schemes
•An organization (usually run by producers or the government) that
•attempts to smooth out fluctuations in prices & producer incomes
•by the purchase and sale of stocks of particular goods
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Buffer Stock Manager
•Buys and sells in the market to manipulate demand and supply to stabilize prices
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Example
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Practice
•ACTIVITY 28 – Farm Price Supports
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Price Ceilings and Floors Practice
•Set of Practice Questions
•Minimum Wage & Rent Control Questions