Concept: Price Controls

Market equilibrium occurs where the supply and demand curves cross. In the absence of external forces, the market price and quantity are determined at this point. Sometimes, however, governments interfere with the free working of a market. In some cases, they set a price ceiling—a maximum allowable price. No one is allowed to buy or sell at any price higher than this legal ceiling. The most common example of a price ceiling is rent controls set by some city governments.

In other cases, a government sets a price floor—a legal minimum below which the price is not permitted to fall. The federal minimum wage is an example of a price floor set in the market for labor.

Use the slider bar to investigate the effects of price floors and ceilings. By moving the bar to the right of center, you can increase the price above the equilibrium level. This is like setting a price floor. Notice that the quantity supplied at that price exceeds the quantity demanded. The result is what is termed a "surplus".

If you move the slider bar to the left of center, you can set a price ceiling—a price below the equilibrium value. In this case, you should be able to see the "shortage" that results when the quantity demanded exceeds the quantity supplied.