IN CONCLUSION: WEEK OF SEPTEMBER 9th

Recap

This past week, you were introduced to price controls. In a handful of markets, the government will impede the normal operation of free markets by fixing the price of a good or service either below or above equilibrium.

A price control set above the equilibrium price that would be set by buyers and sellers is called a price floor. A price control set below the equilibrium price that would be set by buyers and sellers is called a price ceiling. We examined the effects of both price controls in markets, as well as additional actions that government may take to reduce those effects.

Recall that the most prevalent example of a price floor in our society is the minimum wage. It is the minimum price (wage) guaranteed to suppliers of unskilled labor, which primarily includes teenagers, but also includes working adults with very little education and working skills.

The best example of a price ceiling is a rent control on housing in some urban markets. Price ceilings are established on consumer goods as a way of freezing prices and protecting consumers from inflationary factors. Regardless of the price control, economists do not like them and neither should you. Lastly, we delved into how consumers and producers incur benefits from participating in markets, called consumer and producer surplus or economic surplus. This economic surplus is reduced as a result of market distortions such as price controls or the imposition of excise taxes in some markets.

Looking Ahead

In the coming week, we will  move into section 3.5 of chapter three. In this section, we explore how markets in equilibrium, or free markets, provide benefits to both consumers and producers. We call this benefit consumer and producer surplus or simply economic surplus. This is called the study of social welfare in markets. In particular, we will take a look at how economic surplus is reduced when a price control is established, as well as when an excise tax is imposed on either consumers or producers.