<u>When markets are allowed to freely fluctuate, prices tend to the equilibrium</u>, the quantities supplied and demanded are equal and the market is cleared.
If the supply of a certain good drops due to a natural disaster, for example, there is an excess of demand and therefore there is a subsequent price increase, so that many consumers refuse to demand such product at a more expensive price, and the price rise continues until demand and supply are equaled again forming a new equilbrium.
<u>When price controls are established, natural market movements are distorted. </u>There are two situations:
A price floor is the minimum price allowed for a good, which is established by an economic authority and which distorts the market when it is located above the equilibrium price, creating a situation of excess supply. The most famous price floor is the minimum wage in the labor market.
A price ceiling is the maximum price allowed for a good, which distorts the market when it is smaller than the equilibrum because it creates a situation of excess demand.
American consumers also influence the government's involvement in the economy at election time and by contacting their government leaders and expressing their concerns.
