IB Economics SL & HLTopic 2.7 — Government InterventionPaper 1 & 2Diagram skill~12 min read
Price Ceilings and Price Floors
Taxes and subsidies nudge a market. Price controls do something far blunter: they make a price illegal. The market still wants to move, it just is not allowed to — and that trapped pressure comes out as a shortage or a surplus every single time.
📚 What you need to know
A price ceiling (maximum price) is set below equilibrium. Above it, selling is illegal.
A ceiling causes excess demand: a shortage equal to Qd − Qs.
A price floor (minimum price) is set above equilibrium. Below it, selling is illegal.
A floor causes excess supply: a surplus equal to Qs − Qd.
A control set on the “wrong” side of equilibrium does nothing at all — it is not binding.
Ceilings help buyers who still get the good and hurt those who cannot. Floors help sellers but leave unsold stock.
A minimum wage is a price floor in the labour market, and the surplus there is called unemployment.
Price ceilings: holding a price down
Governments use a maximum price when they think buyers are being priced out of something they need — rent, staple food, fuel during a crisis. The intention is easy to defend. The side effects are the part you have to be honest about.
At a lower price two things happen at once. Buyers want more of the good, because it is cheap. Sellers want to supply less, because it is no longer worth as much to them. Demand goes up, supply goes down, and the gap between the two is the shortage.
The quantity that changes hands is Qs, not Qd. Sellers cannot be forced to produce, so supply sets the limit.
Say this out loud once and it sticks: the short side of the market wins. Whichever quantity is smaller is the one that actually gets traded, whether the control is a ceiling or a floor.
What follows from a shortage
Queues and waiting lists. If price cannot ration, something else has to. Usually time.
Black markets. Buyers who missed out are willing to pay far more than the legal price, so illegal selling appears.
Quality slides. With buyers queueing anyway, a landlord or seller has little reason to keep standards up.
Producers lose out. Lower price and lower quantity, so producer surplus falls.
Consumers are split. Those who get the good pay less and gain. Those who are shut out gain nothing.
The government may have to step in again and supply the missing quantity itself, which costs money.
Careful with consumer surplus. It does not simply rise. Lucky buyers gain from the lower price, but a chunk of surplus disappears with the buyers who can no longer get the good at all. Work it out with the trapezium, do not guess.
Price floors: holding a price up
A minimum price is set above equilibrium, usually to protect producers — farmers whose incomes swing wildly — or to push down consumption of something harmful, like a minimum price per unit of alcohol.
Now the two sides move the other way. The higher price tempts sellers to supply more and puts buyers off, so unsold stock piles up.
Mirror image of the ceiling diagram. Same two curves, same idea, just the control line moved to the other side of equilibrium.
What follows from a surplus
Unsold stock. In farming the government often buys it, stores it, or exports it — all at a cost.
Opportunity cost. Money spent buying up a surplus is money not spent on hospitals or schools.
Over-dependence. Guaranteed prices can leave producers with no reason to become more efficient.
Consumers pay more and buy less, so consumer surplus falls.
Resources are misallocated. Land, labour and capital keep flowing into a product that people do not want at that price.
Not every floor is meant to help sellers. A minimum price on alcohol is designed to cut consumption. In that case the shrinking quantity bought is the point, not a side effect — and the government has no intention of buying the surplus.
The minimum wage: a floor in the labour market
Same diagram, different labels. The price becomes the wage, the quantity becomes the number of workers, firms are the buyers and workers are the sellers. Set a wage above equilibrium and more people want jobs while firms want fewer of them. That gap has a name: unemployment.
The trade-off is right there on the diagram: higher pay for Qd workers, no pay at all for the gap between Qd and Qs.
🧩 Answering any price control question
Draw S and D and mark the free market PeQe.
Draw the control line: below equilibrium for a ceiling, above for a floor.
Read off Qd and Qs at that price. Label both.
Name the gap: excess demand or excess supply, and say which quantity is actually traded.
Explain the knock-on effects — queues and black markets, or unsold stock and government buying.
Finish by saying who gains and who loses. That is where the evaluation marks live.
Worked examples
WORKED EXAMPLE
Size of a shortage
In the market for rice, demand is P = 10 − Q/10,000 and supply is P = 2 + Q/10,000, with prices in dollars per sack. The government sets a maximum price of $4. Calculate the equilibrium, the shortage, and the change in producer revenue. [5]
Step 1: Find equilibrium (set the two equal)10 − Q/10,000 = 2 + Q/10,000 → 8 = 2Q/10,000 → Q = 40,000P = 2 + 40,000/10,000 = $6Step 2: Quantities at the $4 capQd: 4 = 10 − Q/10,000 → Q = 60,000Qs: 4 = 2 + Q/10,000 → Q = 20,000Step 3: The shortage60,000 − 20,000 = 40,000 sacksShortage = 40,000 sacksStep 4: Producer revenue before and afterbefore: $6 × 40,000 = $240,000after: $4 × 20,000 = $80,000Revenue falls by $160,000only 20,000 sacks are traded — the short side wins
WORKED EXAMPLE
Change in consumer surplus
Using the same rice market, calculate the change in consumer surplus caused by the price ceiling. [3]
Step 1: Consumer surplus before (a triangle)
Demand hits the axis at $10, price was $6, quantity 40,000.
(10 − 6) × 40,000 ÷ 2 = $80,000Step 2: After the cap it becomes a trapezium
Only 20,000 are traded. At 20,000 the demand price is 10 − 2 = $8side a = 10 − 4 = 6, side b = 8 − 4 = 4, width = 20,000(6 + 4) ÷ 2 × 20,000 = $100,000Step 3: Difference100,000 − 80,000 = 20,000Consumer surplus rises by $20,000it rose here, but the buyers who got nothing are inside that number too
WORKED EXAMPLE
A minimum wage
Demand for labour is Qd = 110,000 − 5,000W and supply is Qs = 5,000W − 10,000, where W is the hourly wage. A minimum wage of $15 is introduced. Find the excess supply of labour and the change in the total wage bill. [5]
Step 1: Equilibrium wage110,000 − 5,000W = 5,000W − 10,000 → 120,000 = 10,000W → W = $12Q = 110,000 − 60,000 = 50,000 workersStep 2: At W = $15Qd = 110,000 − 75,000 = 35,000Qs = 75,000 − 10,000 = 65,000Excess supply = 30,000 workersStep 3: Total wage bill before and afterbefore: 12 × 50,000 = $600,000 per hourafter: 15 × 35,000 = $525,000 per hourWage bill falls by $75,000 per hourworkers who keep their job gain, but 15,000 jobs disappeared
💡 Exam tip
Draw the control line as a solid horizontal line right across the diagram, and label it Pmax or Pmin. A short stub loses clarity marks.
Always mark three quantities: Qd, Qe and Qs. Two of them are the edges of the gap.
Write the sentence “only Qs is traded” (ceiling) or “only Qd is bought” (floor). Examiners look for it.
If a price control is drawn on the wrong side of equilibrium, say clearly that it is not binding and nothing changes.
For consumer surplus after a ceiling, reach for the trapezium formula, not the triangle.
Bring in a real example: rent controls, alcohol minimum pricing, farm support prices, national minimum wage.
⚠ Common mix-up
Putting the ceiling above equilibrium. A maximum price above the market price changes nothing. The word “maximum” makes students draw it high — it goes low.
Saying the quantity traded is Qd under a ceiling. It is Qs. Firms cannot be made to produce more.
Assuming consumers always win from a ceiling. Some do, but the ones locked out of the market do not.
Confusing a surplus with a profit. Excess supply is unsold stock, not money.
Shifting a curve for a price control. Nothing shifts. Neither curve moves — you just draw a line.
Forgetting the minimum wage is a price floor. Same analysis, and the gap is unemployment.
Up next: Direct Provision, Regulation and Nudges — the interventions that do not touch price at all.
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