CHAPTER 6, SECTION 3The Price System at Work

FIXED PRICES The PRICE of a good or service is

set by the Government Also called “Price Controls” or

“Price Fixes” Typical in Command Economies,

like North Korea or the former Soviet Union

Supply and demand DO NOT influence price

A Price Ceiling Makes High Prices Illegal

Ceiling – highest point in a room

Price Ceiling = MAX

the MAXIMUM price that may be legally charged for something

A Price Ceiling Makes High Prices Illegal

If the Price Ceiling is set too low, what happens?

Low Price means consumers will buy a lot

Price Ceilings that set prices too low will create SHORTAGE

Fixed Prices prevent an upward price adjustment

Rent Control – a Price Ceiling (CA, NY) State

government legally imposes below-market rates for rental housing

Consumers like low rent

Diminishes incentives for Landlords who cannot profit as much

Seinfeld Video – Rent Control

http://criticalcommons.org/Members/Ghent/clips/the%20apartment_rent%20control.mp4/view

Begin video at 1:24

A Price Floor Makes Low Prices Illegal

FLOOR – lowest point in a room

Price Floor = MINIMUM

the MINIMUM price that may be legally charged for something

A Price Floor Makes Low Prices Illegal

If the Price Floor is set too high, what happens?

High Price means consumers will not buy a lot

Price Floors that set too high a price will create SURPLUS

Fixed Prices prevent a downward price adjustment

MINIMUM WAGE – a Price Floor State

government legally imposes above market rates for labor

Employees want high wages

Employers (who BUY labor) don’t like “high prices” for labor, so hire fewer people

Quick WriteSHOULD THE U.S. GOVERNMENT IMPOSE A PRICE CEILING ON THE SALE OF GASOLINE IN THE UNITED STATES?

Why or why not?

Gas Prices: What might happen if the US government set a Price Ceiling on Gasoline below its actual value?

Video about Ceilings and Floors http://www.youtube.com/watch?v=XgBP

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