Market-driven, IEU-supplying-demand-driven, price-in-quantity, presume that we have a free market, that is a market that's free of any outside intervention is allowed to do with something. Who has the power and motivation to interfere with the market mechanism? The government may interfere with market operations if it feels it is protecting society or it's own part of society from harm. The government will establish a price floor, a legal minimum price for the market. If it feels that the market price is too low, thus the price floor will be set above the equilibrium. Who is the price floor meant to protect? The price floor is meant to protect the seller. From what? Well, a price that's too low for sellers would be too low to cover costs and keep the seller in business. What kinds of businesses would be important enough to warrant this kind of government help? Typically, agriculture or food industries, the government feels the need to support the farmers in order to keep our domestic food supply intact. Okay, so the government imposes a price floor, PF, on this market. Let's say that this is the market for milk in upstate New York, as was the case some years back. What happens at PF? Dairy farmers are quite happy with this price and are willing to provide QS units of milk. Consumers, however, aren't too keen on this price and are only willing to buy QD units of milk. The result of the price floor, a surplus of milk in the market. No problem, right? Surpluses are easy enough to fix. The price drops and oops, the price cannot adjust downward to get rid of the surplus. Now what? Well, maybe the government could buy up all the surplus, but then what do they do with it? I don't know, maybe give it to schools, the troops, the homeless, foreign countries. Any of these uses would require pretty extensive and expensive distribution network in bureaucracy paid for by, you guessed it, the taxpayers. So now we're paying high prices for milk and paying to buy and distribute the excess. Well, what if the government decides it's not such a great idea and refuses to buy the surplus? Hey you farmers, we're already keeping the price of your milk propped up. Deal with your own surplus. Now what happens? No one wants the milk at the high prices and it isn't legal to sell it below PF. In upstate New York, a lot of farms have creeks running through the property and farmers dumped their surplus milk out back into the creek and on into the Susquehanna and Shininga rivers. Question, rather than impose an artificial price on the market, resulting in all manner of other problems, is there any way to well manage the market to get the equilibrium price up to PF where we want it to be? Well, sure, we could alter the underlying market conditions, the demand and supply. How do you push price upward by using demand? You increase the demand for milk, maybe by using celebrities in a nationwide got milk campaign or by citing research that says milk helps you lose weight. On the supply side, if the milk supply could be reduced, price would rise. This is often why you hear about the government paying farmers not to produce their product. What about the other side? Price ceilings are established when the government feels that the market equilibrium price is too high, too high for whom? For buyers, price ceilings are meant to protect buyers from high prices. Not for all products mind you, price ceilings are more likely to be applied to products that everyone needs that are perceived as being necessary and necessarily affordable to all income groups. Housing like rent controls and energy are typical candidates for price ceilings. Consider gasoline. Just after 9.11, both state and federal proposals were made to cap the price of gasoline at $2.50 a gallon to prevent price gouging at the pump. Sounds like a pretty good deal compared to the three or $4 gas, doesn't it? But consider the implications. The proposed price ceiling, PC, was to be at $2.50 a gallon. But the actual market equilibrium price is, say, $4 a gallon. At price PC, the price ceiling, consumers are very happy. They want to buy QD gallons of gas. Gas station owners, however, are only willing to provide US gallons of gas at this price. This means that not everyone is going to get the gasoline that they want because there is a shortage. Well, that's OK, right? As a result of the shortage, prices will rise and wait. Prices can't rise. So what happens? Rationing? Black markets for gasoline? Long lines at the pump? Think about this. Would you rather know that you can get gas as long as you're willing to pay $4 a gallon or hope that you can get gas at the price ceiling of $2.50. Is there a way to make $2.50 the equilibrium price instead of imposing it on the market as an artificial price in creating the shortage that leads to other problems? Yes. If we could, say, decrease the demand for gas, say, more public transit, better fuel mileage on cars, more conservation, and or increase the supply of gas, maybe open the national strategic reserves or drill in the Alaska wild rife refuge, et cetera, then you would push the price closer to where we want it to be. Next time, for microeconomics elasticity, for macroeconomics, inflation.