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Consumer choices - Price Controls government policies that...

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Price Controls – government policies that attempt to hold the price at a disequilibrium value. If Q d ≠ Q s , then the lesser of the two will be exchanged. I. Price Floors: a minimum permissible price. A. Basic Outcome – a price floor is set above the equilibrium price or it will be inconsequential. P S P f P* D 0 Q d f Q* Q s f Q Sellers would like to sell the amount Q s f at the set price, but buyers are only willing to purchase the amount Q d f (it is this amount that is exchanged). Q s exceeds Q d and the price is not allowed to adjust to equate the two, so there is persistent excess supply. This is called a surplus. Example: the minimum wage
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B. Price Floors and Efficiency: P a S P f b P* d c e f D 0 Q d f Q* Q s f Q CS without the price floor is the area bounded by aP*c CS with the price floor is the area bounded by aP f b The loss in CS is the area bounded by P f P*cb PS without the price floor is the area bounded by P*fc PS with the price floor is the area bounded by P f feb The area bounded by dec is lost to the producer, but the area bounded by P f P*db is gained.
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