3.4 Price Ceilings and Price Floors

LEARNING OBJECTIVES

By the end of this section, you will be able to:

• Explain price controls, price ceilings, and price floors

• Analyze demand and supply as a social adjustment mechanism

To this point in the chapter, we have been assuming that markets are free, that is, they operate with no

government intervention. In this section, we will explore the outcomes, both anticipated and otherwise, when

government does intervene in a market either to prevent the price of some good or service from rising “too

high” or to prevent the price of some good or service from falling “too low”.

Economists believe there are a small number of fundamental principles that explain how economic agents

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3.4 • Price Ceilings and Price Floors 71

respond in different situations. Two of these principles, which we have already introduced, are the laws of

demand and supply.
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