A minimum price is a government-imposed price control whereby the price is set at a level above the equilibrium (or market-clearing) price. Because producers cannot charge a price below the minimum price, it is also called a price floor (cannot go below a floor). Price floors are set up primarily for two reasons. First, it allows producers to receive more income for the sale of their goods and services, and targets such products that governments consider “good” for society like agricultural products (i.e. milk). Second, when applied to workers, it establishes a minimum wage by which workers are guaranteed a “high” wage to live reasonably in an economy. According to neo-Classical economists, this causes real-wage unemployment (see relevant post).

Before the price floor, the market is in equilibrium at price p* and quantity q*. The government then sets a price floor (pmin), which causes demand at q1 to be less than supply at q2, and is called excess supply. This causes a surplus. Regarding the surplus good, the government can store it, destroy it or attempt to sell it.

A maximum price is a government-imposed price control whereby the price is set at a level below the equilibrium (or market-clearing) price. Because producers cannot charge a price above the minimum price, it is also called a price ceiling (cannot go above a ceiling). Price ceilings give consumers with less purchasing power access to their goods and services, and targets such products that governments consider “good” for society like rent control in a major city like New York. This causes quantity demanded to increase. However, we will see some producers leave the market because the price is too low to supply the product, and quantity supplied decreases.

More explicitly, before the price floor, the market is in equilibrium at price p* and quantity q*. The government then sets a price ceiling (pmax), which causes demand at q1 to be greater than supply at q2, and is called excess demand. This causes a shortage. Regarding the good, the government can supply the g/s itself or subsidize private firms to supply the g/s. In an incredibly misguided example of a real-world application reported by the BBC, Venezuelan President Hugo Chavez placed maximum prices on staple foods like milk and rice to ensure his people would have access to cheaper products starting in 2003. Unfortunately, this (obviously) led to shortages of such important goods.