Price controls

0:00- [Instructor] So in this video, we're gonna talk a little bit about price controls and to do that, we're going to review what we might already know about supply and demand. So this is your traditional supply and demand graphs or curves, however you want to think about it.

0:13In our vertical axis, you have price, horizontal axis, you have quantity and this, in yellow we have our demand curve and in green we have our supply curve and we can just make sure we understand the intuition here. At A, if we just think about demand, at a high price, people aren't going to want too high of a quantity and at a low price, people might demand a lot of it because it's now more affordable, it's cheaper.

0:40Similarly, at a low price, suppliers aren't going to want to produce a lot of quantity and at a high price, they would wanna produce a lot of quantity and where these two intersect is the equilibrium price and the equilibrium quantity. So we could write EQ for equilibrium quantity and EP for equilibrium price if we wanna write it that way and what we have learned and there's many videos on Khan Academy that go into a lot more depth on this, is if you have shifts in the supply or the demand curve, you would get a new equilibrium price and equilibrium quantity.

1:16Let's say for some reason, all of a sudden, firms become a lot more productive and supply shifts up, so it shifts to the right, so this is the new supply curve right over here, well, now your equilibrium price has gone down and your equilibrium quantity has gone up.

1:34Similarly, let's just start from actually where we were before, so I don't make this too messy. If let's say the demand shifts up, maybe there's more folks or something got very popular and so demand shifts, you can think of it up or to the right. Well, now we have a higher equilibrium price and a higher equilibrium quantity.

2:00Now, what we're gonna think about in this video is we're talking about price controls and as that implies, it's not just letting the market hit an equilibrium, depending on where the supply and demand curves are, it's actively, it's someone actively or actually trying to control the prices in the market and that's usually going to be the government.

2:19So the first one I will talk about is a price ceiling, price ceiling and this is someone, usually the government saying you cannot charge more than a certain amount for something and a good example of a price ceiling that happens in some places is rent control, rent control.

2:40So let's say what's drawn here is just what the market would look like without rent control. You have this equilibrium price here and you have this equilibrium quantity. Now in a rent controlled world, the government in most cases will say, "Well, we don't like people charging the equilibrium price or rent.

2:59We are going to put a ceiling on it" and so let's say they put this right over here as the rent control price. Lemme put price ceiling maybe for PC and let me draw a line there and now what happens if we say that is the price that has to be charged? Well, what's going to be suppliers?

3:20Suppliers are now going to produce less than they had before based on these curves and the consumers or the people who are looking for places to stay are going to demand more and so what we have is, is that the supply that we now have is a lot lower than the demand.

3:41So we have a shortage. You have a shortage in this situation. Another very visible example of it was in the 1970s when the government tried to put in price controls on gasoline. You had a shortage and you had lines going for miles for people trying to get gas, but there wasn't enough gas to be had.

4:02Once again, producers weren't willing to produce as much at the lower price and there was way more demand at the lower price. So typically price ceilings, like rent control or caps on any type of prices tend to lead to some kind of shortage. Now, the other type of price control you will often see is a price floor, price floor and a common version of this is a minimum wage, minimum wage.

4:31In a minimum wage world, the suppliers are people working, people who wanna be labor and the demand is coming from employers. Now, again, this is our equilibrium price and this is our equilibrium quantity, but we're now having a price floor. We're saying, "Hey, we don't like this equilibrium price," which would be what the equilibrium wages are in say, one of these labor markets, "we are going to raise it, we want people to make more money."

4:58So let's call this the price floor, right over here. I'll put it right over there and now what is going to happen? Well, at this price, there is a lot less demand for the labor. The employers are saying, "Hey, if I have to pay that much, I might not need as many people, or I can't afford to have as many people" and at that higher salary, higher wage, you have more people willing to work.

5:26So what you have here is you have a surplus. So if these grass hold and these are fairly simplified assumptions here, you might increase the unemployment rate. That is typically one of the main arguments against something like a minimum wage. Now, there's arguments that you could have either way, but this gives you the basic understanding of how price controls work at least when you just think about it from a supply and demand curve and how they could theoretically lead to shortages or surpluses.