Manipulating the market: Price controls

Activity

Principles of Microeconomics: "Chapter 4, Section 2: Government Intervention in Market Prices: Price Floors and Price Ceilings"

• Read this section to learn why the government sometimes chooses to control prices. Attempt the "Try It" problem. Take a moment to read through the stated learning outcomes for this chapter of the text, which you can find at the beginning of each section.

Wolfram Demonstrations Project: "Price Controls"

• To use this simulation, you must download and install the Mathematica Viewer from the Wolfram Demonstrations Project. Although this software is free, it is a sizable download. This activity is therefore optional.

Seeing how the market responds to various control mechanisms proves instructive, as the same action can have different consequences, depending upon the initial conditions of the system to which it is applied.

Once you have downloaded the software to your desktop, open the simulation and read the instructions. Manipulate the three variables and note how varying combinations of elasticity of demand, elasticity of supply, and the price control point ("set price") can affect total surplus. It is worth noting that two prices can result in the same quantity consumed. Notice how when the price is set above equilibrium, the amount of shortage is a function of both the elasticities of demand and supply. Similarly, with set prices below equilibrium, the amount of surplus is a function of the various elasticities of demand and supply.

You should take care to note the relationship between surplus quantities and reduced total surplus (consumer surplus plus producer surplus). Intervention prevents markets from operating freely and results in less consumption than at equilibrium and therefore results in an inefficient market.