This chapter is about the government's reaction towards the consumers and the producers. By making regulations such as, "Price ceilings" and "Price floors" the government tries to support the consumers and producers. However, as according to the Adam Smith's invisible hand the market is supposed to flow the best when it is untouched by the government so there are also negative outcomes that come from these regulations.

Key Concepts:

What is a Price Ceiling?


When a Price ceiling is binding, consumers are benefiting as the price of the products will be limited to certain point and it will be cheaper. For suppliers, they will lose some money as they can't raise the money to certain points. As an example of a price ceiling is rent prices. For short term, consumers will benefit quite a lot since the prices offered by the rents will go down. However, viewing the long term effects, it is worse off for both consumers and producers. People supplying the rent will slowly decrease, and this will give renters chance to choose who to lend the rent to. Additionally, as suppliers are making less money, and as there are more people wanting the rent so there will be same amount of people wanting the rent without any development, the incentive of developing the rent is taken away. Therefore as a long term, the region with price ceiling to rent, will not develop.

What is a Price Floor?

When a Price floor is binding workers working at minimum wage benefits. However, in long term problems may rise. As there are minimum amount of money promised to the workers, the workers with job and without jobs are in bigger problem. Companies, not being able to supply such money, numbers of workers they use will go down. Therefore, people with jobs will easily be replaced, as well as people without jobs will not get jobs as there are less place available. Long term wise, minimum wage will hurt both suppliers and consumers.

How does taxes on sellers affect market outcomes?

1. Taxes will discourage the market activity. Eventually, the quantity of the good sold will get smaller and new equilibrium point will be found.

2. Buyers and sellers will share the burden of taxes, no matter where the tax is put on to. Buyer pays more money, and seller receives less money.


How does taxes on buyers affect market outcomes?

It is not even necessary to explain the steps of the outcomes that will occur from tax.

When tax is adjusted to any side, not mattering buyer or the seller, they both share the burden of the tax. None of them benefits, leading a creation of Dead Weight Loss!! (Further more in chapter 8, Dead Weight Loss will be covered more deeply)


Video reviewing Price ceiling and Price floors


Over this chapter, Government policies of price ceilings and price floor was learned. Although to certain degree, government policies will finish things faster and there will be faster and rapid change in the economy that might help the economy in a good way. However, it must be remembered that it is best when there is no government intervention. Also according to Adam Smith, the market will work in its best shape when it is not intervened and when it is only formed by individual's seeking for benefits.


1. A legal maximum price at which a good can be sold is a price

a. floor.

b. stabilization.

c. support.

d. ceiling.

2. A price ceiling will only be binding if it is set

a. equal to equilibrium price.

b. above equilibrium price.

c. below equilibrium price.

d. A price ceiling is never binding in a free market system.

3. When binding price ceilings are imposed to benefit buyers

a. every buyer in the market benefits because of lower prices.

b. some buyers will not be able to buy any of the product.

c. sellers in the market will equally benefit from a price ceiling.

d. the quantity sellers want to sell will equal the quantity buyers want to buy.

4. A price ceiling that is not binding will

a. cause a surplus in the market.

b. cause a shortage in the market.

c. cause the market to be less efficient.

d. have no effect on the market price.

5. Price controls are

a. used to make markets more efficient.

b. usually enacted when policymakers believe that the market price of a good or service is unfair to buyers or sellers.

c. nearly always effective in eliminating inequities.

d. established by firms with monopoly power.

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Vocab List

Price Ceiling: A legal maximum on the price at which a good can be sold
Price Floor: A legal minimum on the price at which a good can be sold.
(Those two regulations are what this chapter is mostly about)
Taxes: Money collected by the government to raise revenue for public projects. However, by having tax, dead weight loss is created.
Tax incidence: How the tax is divided between both the consumers and the producers.