Question

Price floors and price ceilings often lead to unintended consequences, because buyers and sellers have many ways to react to price controls (what the textbook calls "many margins for action"). List four ways buyers or sellers react to price controls (i.e. "margins for actions") that lead to unintended consequences.

Answer 1

Answer:

When price ceilings are set:

• the quantity demanded will increase because customers will believe that the product is "cheap", e.g. rent control results in a larger demand for rental units.
• the quantity supplied will decrease because suppliers believe that they will not earn enough profit from selling the goods or services, e.g. rent control decreases the number of rental units.

When price floors are set:

• the quantity demanded will decrease because consumers will consider that the products are "too expensive", e.g. a high minimum wage reduces the number of people employed.
• the quantity supplied will increase because suppliers will be making higher than normal profits, e.g. if the minimum wage is too high, more people will be willing to enter the labor force and search jobs.