Price Floor

no macro economics Allah shmoop price ceilings and price floors

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

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

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

for less than 100 bucks a gallon because well probably

too many people would die if they drank it Yeah

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

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

ceiling the rent control measures in New York City establish

a price ceiling for the rental rates of certain buildings

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

is rife with corruption like many wealthy people live in

these rent controlled buildings and take advantage of the system

But for our purposes just know that they set a

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

know you can rent it for more than whatever per

foot per month Yeah alright The intention behind setting a

price ceiling is arguably good One a certain good or

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

many normal people to afford So you know the government

wants to make it more affordable Well how many times

have we said to ourselves I wish this thing that

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

of trying to make that wish come true But like

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

to defy gravity Of course setting a price cap can

deliver unintended consequences if a price ceiling is set below

the equilibrium price for that good or service a shortage

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

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

graph again it It shows how supply changes as prices

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

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

given product at a given price well if it makes

sense to produce more thin producers will produce more Yeah

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

out this graph Well It shows how demand changes as

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

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

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

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

are such that sellers and buyers are both equally happy

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

number of transactions You know kind of like Mama Thanksgiving

equally happy and unhappy But what happens if the government

mandates the setting of an artificial price That is they

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

you got problems all right In the case of Rent

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

right down here somewhere you end up with too much

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

pay 400 bucks a month for this beautiful four bedroom

apartment overlooking Central Park Its market price is probably like

20 grand a month Another example Immediately after a snowstorm

people run to the store to get road salt and

if you live in California or Arizona or anywhere else

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

roads so the ice on the roads melts off because

you know science In order to make driving and walking

conditions safe the government caps the price of rock salt

so that everyone can afford it And this kind of

makes sense right Because it would be bad for a

whole lot of innocent streetwalkers are rather you know people

walking on the street to have a bunch of road

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

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

prices to be low The government is protecting a bunch

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

for this protection The low prices mean people bum rush

stores and clear amount of supply The shortage of rock

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

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

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

where the equilibrium price for a one bedroom apartments 1200

bucks and the government institutes a price ceiling of a

grand Well the price cap messes with the market impacting

both supply and demand Demand has increased because well now

there are more people who can afford the apartment who

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

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

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

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

a bunch of apartments but it changes the incentive structure

making it less profitable for the landlords and the shareholders

of the buildings To rent out those apartments well owners

will start looking for places to put their resource is

other places like not in improvements in the buildings They

may turn the apartments into condos They might sell the

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

into retail space over the long run Fewer new apartments

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

incentivized to do so The current price structure makes no

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

are the opposite of a price Ceiling is a price

floor which is a government imposed limits on how low

the price of a good or service can go Example

Well after the Great Depression the U S Government instituted

several price floors an agricultural markets in an effort to

protect farmers from the horrible economy Well this was all

part of the New Deal you know that thing Frankie

D came up with to give victims of the Depression

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

In the time of it pretend the government decided to

set a price for five bucks for the newest iPhone

That means no one could charge less than $5 for

the new iPhone Well since new iPhones clearly cost the

manufacturer and mostly apple more than five bucks well like

a a bunch more than five bucks we can say

with confidence that the equilibrium price for an iPhone is

higher than the price floor Well in this situation the

price for has pretty much no effect on well anything

right because Apple has no incentive to make any more

iPhones if they cost them say $200 each and the

government is telling them they must sell them for more

than $5 each So of course they will sell them

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

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

no one Khun settle an iPhone for under 500 bucks

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

all most of us are probably not going to run

right out and buy a new iPhone for $500 in

second Anyone who does pay 500 bucks for their phone

is now paying a price that is higher than the

equilibrium price Well Third given the dramatic drop in demand

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

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

better cut back on building more iPhones Because now this

ultra expensive iPhone is going to have less volume demand

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

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

the equilibrium price for an iPhone is a $250 Apple

is selling iPhones at an artificially high price That is

above the equilibrium point up here Will you Khun see

the place where the price floor hits the supply curve

You can also see where the price for hits the

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

two Well at 500 bucks Apple wants to make a

lot of iPhones but unfortunately for them not many people

want to buy a lot of iPhones at 500 bucks

in thank you very much All right There are benefits

and drawbacks to price controls They can protect consumers by

making sure they can afford what they need And they

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

producing their goods and services that they might not otherwise

make But they can also lead to economic disequilibrium where

supply and demand are artificially controlled and lead to shortages

and surpluses And over the long run you want to

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

kind of like finding an affordable apartment in the Windy

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