ShmoopTube

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no macro economics Allah shmoop price ceilings and price floors

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Yeah here's a price ceiling No more than a dollar

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a square foot in rent And yes it's called rent

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control And here's a price floor You can't sell arsenic

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for less than 100 bucks a gallon because well probably

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too many people would die if they drank it Yeah

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it's a poison all right so yeah when the government

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said some maximum price for something that's called a price

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ceiling the rent control measures in New York City establish

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a price ceiling for the rental rates of certain buildings

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built in certain times With certain end it's The process

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is rife with corruption like many wealthy people live in

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these rent controlled buildings and take advantage of the system

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But for our purposes just know that they set a

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max rental rate and that's a price ceiling Like you

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know you can rent it for more than whatever per

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foot per month Yeah alright The intention behind setting a

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price ceiling is arguably good One a certain good or

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service has become so expensive that it's nearly impossible for

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many normal people to afford So you know the government

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wants to make it more affordable Well how many times

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have we said to ourselves I wish this thing that

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I need was cheaper fry ceilings or the government's way

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of trying to make that wish come true But like

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all things literary there's a price to pay for trying

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to defy gravity Of course setting a price cap can

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deliver unintended consequences if a price ceiling is set below

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the equilibrium price for that good or service a shortage

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of results Alright so what's an equilibrium point In economic

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terms it's worth supply and demand meet Check out this

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graph again it It shows how supply changes as prices

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change That's the supply curve It's on very Kirby here

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Just supply line If there's a lot of demand for

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given product at a given price well if it makes

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sense to produce more thin producers will produce more Yeah

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duh Like who doesn't want to make money Now check

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out this graph Well It shows how demand changes as

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prices change That's the demand curve where the two curves

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intersect While that's the equilibrium point right where if supply

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equals demand it's where the market reaches a balance between

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supply and demand And that is it's where the prices

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are such that sellers and buyers are both equally happy

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and unhappy with the price they're paying for a given

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number of transactions You know kind of like Mama Thanksgiving

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equally happy and unhappy But what happens if the government

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mandates the setting of an artificial price That is they

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don't let the market reach its equilibrium point You know

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you got problems all right In the case of Rent

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Control you've got a price below the equilibrium point Living

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right down here somewhere you end up with too much

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demand for too little supply Like who wouldn't want to

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pay 400 bucks a month for this beautiful four bedroom

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apartment overlooking Central Park Its market price is probably like

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20 grand a month Another example Immediately after a snowstorm

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people run to the store to get road salt and

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if you live in California or Arizona or anywhere else

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where changes in weather don't exist people put salt on

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roads so the ice on the roads melts off because

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you know science In order to make driving and walking

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conditions safe the government caps the price of rock salt

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so that everyone can afford it And this kind of

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makes sense right Because it would be bad for a

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whole lot of innocent streetwalkers are rather you know people

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walking on the street to have a bunch of road

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unsalted and icy and you know driver's running into them

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You know it's not good in essence forcing rock salt

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prices to be low The government is protecting a bunch

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of innocent potential victims but there's a price to pay

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for this protection The low prices mean people bum rush

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stores and clear amount of supply The shortage of rock

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salt comes about because stores simply can't meet consumers The

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man All right well let's see what this looks like

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on a graph Let's say we live in a city

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where the equilibrium price for a one bedroom apartments 1200

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bucks and the government institutes a price ceiling of a

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grand Well the price cap messes with the market impacting

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both supply and demand Demand has increased because well now

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there are more people who can afford the apartment who

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couldn't come up with the cash when it was $200

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Mohr expensive That's the government school toe Let people afford

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these nicer apartments who weatherize couldn't But the policy also

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effects supply a government Price control obviously doesn't instantly destroy

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a bunch of apartments but it changes the incentive structure

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making it less profitable for the landlords and the shareholders

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of the buildings To rent out those apartments well owners

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will start looking for places to put their resource is

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other places like not in improvements in the buildings They

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may turn the apartments into condos They might sell the

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whole building's altogether or try to turn the whole thing

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into retail space over the long run Fewer new apartments

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of this type will then be built because investors aren't

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incentivized to do so The current price structure makes no

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sense for him so well that's kind of bad Well

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are the opposite of a price Ceiling is a price

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floor which is a government imposed limits on how low

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the price of a good or service can go Example

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Well after the Great Depression the U S Government instituted

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several price floors an agricultural markets in an effort to

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protect farmers from the horrible economy Well this was all

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part of the New Deal you know that thing Frankie

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D came up with to give victims of the Depression

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about a financial relief Okay so let's bring things forward

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In the time of it pretend the government decided to

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set a price for five bucks for the newest iPhone

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That means no one could charge less than $5 for

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the new iPhone Well since new iPhones clearly cost the

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manufacturer and mostly apple more than five bucks well like

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a a bunch more than five bucks we can say

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with confidence that the equilibrium price for an iPhone is

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higher than the price floor Well in this situation the

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price for has pretty much no effect on well anything

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right because Apple has no incentive to make any more

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iPhones if they cost them say $200 each and the

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government is telling them they must sell them for more

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than $5 each So of course they will sell them

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for more than $5 each Ida But let's say that

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price floor was changed from $5 toe $500 Well now

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no one Khun settle an iPhone for under 500 bucks

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Well that changes things a bit doesn't it First of

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all most of us are probably not going to run

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right out and buy a new iPhone for $500 in

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second Anyone who does pay 500 bucks for their phone

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is now paying a price that is higher than the

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equilibrium price Well Third given the dramatic drop in demand

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Apple's going to end up with a major surplus of

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iPhones If they don't do anything about supply like they'd

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better cut back on building more iPhones Because now this

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ultra expensive iPhone is going to have less volume demand

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then would it If it's sold for say 300 bucks

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All right let's look at this on a graph Assuming

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the equilibrium price for an iPhone is a $250 Apple

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is selling iPhones at an artificially high price That is

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above the equilibrium point up here Will you Khun see

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the place where the price floor hits the supply curve

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You can also see where the price for hits the

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demand curve Right here There's a big gap between the

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two Well at 500 bucks Apple wants to make a

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lot of iPhones but unfortunately for them not many people

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want to buy a lot of iPhones at 500 bucks

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in thank you very much All right There are benefits

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and drawbacks to price controls They can protect consumers by

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making sure they can afford what they need And they

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can protect companies by making sure they won't go broke

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producing their goods and services that they might not otherwise

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make But they can also lead to economic disequilibrium where

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supply and demand are artificially controlled and lead to shortages

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and surpluses And over the long run you want to

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kind of let the market do your boss right It's

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kind of like finding an affordable apartment in the Windy

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City Instituting price controls well it involves making some major 00:08:22.249 --> [endTime] trade offs

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