BACC311 Economics: Analyzing Price Floors, Ceilings & Minimum Wage

This report provides an analysis of price floors and price ceilings as price control mechanisms, discussing their effects on market equilibrium and resource allocation. It uses examples such as rent control and gasoline price controls to illustrate the consequences of price ceilings, including shortages and black markets. The report also examines the impact of price floors, particularly the minimum wage, on the labor market, highlighting potential issues such as unemployment and reduced incentives for workplace improvement. Ultimately, the report recommends that the Australian government consider abolishing the minimum wage due to its potential adverse effects on the economy. Desklib offers a platform for students to access similar solved assignments and past papers.

Running head: Economics: Principles, Models and Policies
Economics: Principles, Models and Policies
Name of the Student:
Name of the University:
Author’s Note:

Economics: Principles, Models and Policies 1
Table of Contents
Introduction......................................................................................................................................2
Discussion........................................................................................................................................2
Conclusion.......................................................................................................................................8
Reference List................................................................................................................................10

Economics: Principles, Models and Policies 2
Introduction
This specific assignment will emphasize over the two price control mechanisms price
floor and price ceiling. The price ceiling is used to lower the price level prevailing in the market
while the price floor is used to raise the price level. In the context of price ceiling the
organizations will not be able to raise the price level above the ceiling while the price level could
not be decreased in the context of price floors. In addition to this it will also discuss about the
appropriateness of the minimum wage law of the Australian government and emphasize whether
this should be practiced further or not.
Discussion
Market failure is said to occur when the market demand is not equated with the market
supply. This gives rise to inefficient market outcomes which can be corrected by the government
through changing the incentive structure of effectively allocating the resources or through the
implementation of price ceiling or price floors. The more efficient interpretation of market
failure would be a situation where the economic agents are not properly incentivized for driving
the economy towards the equilibrium (Perkis et al., 2016). A market failure adversely affects the
economy because of the non-efficient allocation of the resources available. In the words of Plott
et al., (2018), the opportunity cost associated with the resources used in creating the product or
the social cost of manufacturing the goods or services if not minimized and this leads to resource
wastage.
In certain cases the government intervene into the market to control the prevailing price
level in the market and implements a few strategies like price floors and price ceilings. The first
instance of government intervening the market is the imposition of a price ceiling. A price

Price of Gasoline
Quantity of Gasoline10
2.00
1.50
5
Supply of Gasoline
Demand for Gasoline
0
Economics: Principles, Models and Policies 3
ceiling is said to take place when the price is deliberately set at a level lower than that of the
equilibrium price level and is not allowed to increase further (Perkis et al., 2016). There are
several instances of price ceilings which can be cited as an example. In most of the cases the
imposition of price ceiling involves the government intervention. Such as in many cities there are
certain rent control measures. The implementation of rent control signifies that the maximum
amount of rest that can be charged is set by a government agency. It is also necessary to mention
that this maximum rent is allowed to increase a certain percentage every year in order to cope
with the prevailing inflation although it will be so designed that the rent remains below the
equilibrium level (Vasigh and Fleming, 2016). Another example of price ceiling can be observed
in the context of the pricing of gasoline. During 1973 through 1981 there was a price ceiling
imposed on the price level of gasoline, the law has set a maximum price for gasoline any owner
of the gas station charging price more than that would be held guilty for business malpractice and
violating the law. The concept of price ceiling could be explained easily with the help of the
following diagram.

Economics: Principles, Models and Policies 4
Figure 1: Price Ceiling Mechanism
(Source: Created by Author)
If it is assumed that the price of gasoline at the equilibrium level is $2.00 per gallon and
this is the market clearing price of Gasoline. Here the government intervene the market and sets
the price of gasoline at $1.50 per gallon as the maximum price that can be charged by the sellers.
At the price set by the government the quantity demanded for gasoline is 10 million gallons
while the quantity supplied is 5 million gallons. Hence there is a shortage of 5 billion gallons of
gasoline. Therefore it can be stated that price ceiling leads to shortage.
The rationing problems that arise because of the shortage is mitigated by the government
through a few strategies. The primary problem is who will get the product and who will not. The
most commonly used strategy to solve this problem is to provide the product on a first come first
served basis (Edenhofer et al., 2017). Another effective method of resolving the problem is to
conduct a lottery. Through this the people who have picked the right numbers will be allowed to
buy the products.
The impact of price ceiling generally benefit the buyers and adversely affect the sellers.
Sellers would try to avoid this loss if it is possible. The most common way of doing so is termed
as the black market. In such a situation the seller raises the price of the product illegally and hope
to get away with it (Pahle, 2017). On the other hand, there are grey markets as well where the
sellers charge for the products which were initially provided free of cost and this is not an illegal
activity as well. for instance if the landlord cannot raise the rent after a certain level he or she can
charge for the parking space, charge for the use of elevator and many more.

Supply
Price
300
200
500000 1000000 Quantity of Amplifiers
Demand
Economics: Principles, Models and Policies 5
A price floor is said to exist when the price level is intentionally held above the
equilibrium level and is not allowed to fall. Several examples of price floors are there, in certain
cases the private businesses maintain a price floor while in some cases the government maintains
a price floor. A case of price floor which was maintained by the private businesses is termed as
fair trade. In the context of fair trade the manufactures used to determine and set a price of the
products and used to inform the retailers that price could not be lowered that that level otherwise
the store would not be allowed to sell any of the products from that manufacturer (Mankiw,
2014). During the time period of 1930 to 1980s this practice was legal and even now sometimes
this practice is conducted. There were several items which were fair traded such as television
sets, washing machines, stereo amplifiers and many more.
Figure 2: Price Floor Mechanism
(Source: Created by Author)

Economics: Principles, Models and Policies 6
The figure above depicts the market scenario for stereo amplifier. It is quite evident from
the diagram that the equilibrium price for stereo amplifier is $200. However, the manufacturer
has set a price floor at $300 and hence price is not allowed to fall below that level. The quantity
demanded of stereo amplifier is 500000 while the supply of the same is 1000000. There is a
surplus of 500000 and therefore it can be stated that price ceiling always creates surplus.
There are several processes through which this problem if surplus can be mitigated. For
instance there was a store that simply broke the policy of the manufacturer and lowered the price
level so as to sell away the surplus (Kaufman, 2016). Despite of being threatened by the
manufacturer the retailer kept on selling the product at a lower price.
There are certain cases when it becomes necessary for the government to intervene in the
market and control the operations of certain businesses. For instance if the firms operating in the
same industry decide to hold the price at a higher level than that of the equilibrium level there
will certainly be inefficient resource allocation. In such a case if the governments intervene and
sets the price ceiling that would certainly be helpful for the buyers and the market will become
stable. However the price ceiling should be set in accordance with the equilibrium so that it does
not harm the producers as well (Bronfenbrenner, 2017).
It is needless to mention that like price ceiling the price floor also brings about a few
unintended consequences. For instance the proponents of the minimum wage theory would be
compelled to think twice whether they are helping the workers or not due to these consequences.
At the market clearing wage that is at the equilibrium wage the demand for and supply of
labor is equal to each other. Now if the government sets the price floor above the market clearing
wage as the Australian government has done, it will induce an excess supply of labor in the

W1
W0
Wage Rate
No. of WorkersED ESE0
Labor Demand
Labor Supply
Economics: Principles, Models and Policies 7
market (Herings, 2015). There will certainly be supply glut which means that there will be more
worker who will be willing to work at that wage. This situation is termed as the emergence of
unemployment.
Figure 3: Minimum Wage Implementation
(Source: Created by Author)
In the figure above the equilibrium wage rate is W0 and at this wage rate the employers
are demanding E0 number of employees and E0 number of people are applying for the jobs and
hence the demand for labor becomes equal to the supply of labor. Now the government sets the
price floor of wage rate at W1, now there are ES number of employees who are willing work at
the wage offered by the organizations while with the increased wage organizations are
demanding less workers ED. Therefore, there arises a surplus of ES-ED.

Economics: Principles, Models and Policies 8
There are several problems that may arise because of the imposition of this price floor on
the market clearing wage. In the long run the employer will respond immediately and cut back
the number of employees. In further long run the manufacturer will change the production
technique so that their demand for labor reduce (Sexton, 2015). For instance they can use more
technology intensive production techniques use more machinery and equipment which will
enable the existing workers yield better and increased output. Therefore, this will increase the
productivity of the existing workers marginally given that more machinery in the workplace will
enable the worker to produce more output in one hour.
The workplace environment may also worsen, when an employer is forced to pay more
wages to the employees it will ensure that more people are willing to work for the organizations.
The workers who are unemployed will always be ready to replace an existing worker and the
organization will lose the incentive to make the workplace better. For instance it may reduce the
break time or stop providing free lunch (Cowen and Tabarrok, 2015).
As a policy maker I would rather recommend that the Australian government should
abolish the minimum wage. This is because this implementation of minimum wage will give rise
to several difficulties along with a huge unemployment which is not good for the overall
economic health of the country.
Conclusion
On a concluding note it can be stated that the discussion regarding the price ceiling and
price floor mechanisms for controlling the pricing mechanisms may be useful in certain
situations but are not good for the health of the economy. In both of the cases there are

Economics: Principles, Models and Policies 9
consequences which can affect the economy adversely. Hence it is not desired that the
government implement any one of these mechanisms until and unless it becomes necessary.

Economics: Principles, Models and Policies 10
Reference List
Bronfenbrenner, M., 2017. Income distribution theory. Routledge.
Cowen, T. and Tabarrok, A., 2015. Modern principles of economics. Palgrave Macmillan.
Edenhofer, O., Flachsland, C., Wolff, C., Schmid, L.K., Leipprand, A., Koch, N., Kornek, U. and
Pahle, M., 2017. Decarbonization and EU ETS Reform: Introducing a price floor to drive low
carbon investments. Mercator Research Institute on Global Commons and Climate Change
(MCC) Policy Paper.
Hatfield, J.W., Plott, C.R. and Tanaka, T., 2015. Price Controls, Non-Price Quality Competition,
and the Nonexistence of Competitive Equilibrium.
Herings, P., 2015. Equilibrium and matching under price controls.
Kaufman, B.E., 2016. Adam Smith’s Economics and the Modern Minimum Wage Debate: The
Large Distance Separating Kirkcaldy from Chicago. Journal of Labor Research, 37(1), pp.29-52.
Mankiw, N.G., 2014. Principles of macroeconomics. Cengage Learning.
Perkis, D.F., Cason, T.N. and Tyner, W.E., 2016. An experimental investigation of hard and soft
price ceilings in emissions permit markets. Environmental and Resource Economics, 63(4),
pp.703-718.
Perkis, D.F., Cason, T.N. and Tyner, W.E., 2016. An experimental investigation of hard and soft
price ceilings in emissions permit markets. Environmental and Resource Economics, 63(4),
pp.703-718.

Economics: Principles, Models and Policies 11
Plott, C.R., Roll, R., Seo, H. and Zhao, H., 2018. Tick Size, Price Grids and Market
Performance: Stable Matches as a Model of Market Dynamics and Equilibrium.
Sexton, R.L., 2015. Exploring economics. Cengage Learning.
Vasigh, B. and Fleming, K., 2016. Introduction to air transport economics: from theory to
applications. Routledge.