PRICE CEILINGS

AND PRICE FLOORS

What Are Price Controls?
• Price controls are government-mandated legal
minimum or maximum prices set for specified
goods. They are usually implemented as a means of
direct economic intervention to manage the
affordability of certain goods.
 Understanding Price Controls
Governments most commonly implement price controls on staples—essential
items, such as food or energy products. Price controls that set maximum prices
are price ceilings, while price controls that set minimum prices are price floors.

REPUBLIC ACT 7581 or the Price Act was signed into law on May
27, 1992. It took effect on June 7 of that year. The law provides consumer
protection by stabilizing the price and supply of basic necessities and prime
commodities and prescribing measures against undue price increases especially
during emergencies.
Definition of Terms. For purposes of this Act, the
term:
(1) “Basic necessities” includes: rice; corn; bread; fresh, dried and canned fish and other marine
products, fresh pork, beef and poultry meal; fresh eggs; fresh and processed milk; fresh vegetables;
root crops; coffee; sugar; cooking oil; salt; laundry soap; detergents; firewood; charcoal; candles; and
drugs classified as essential by the Department of Health;
(2) “Butter fund” means a contingent fund in the budget of the implementing agency which shall
not be used in its normal or regular operations but only for purposes provided for in this Act;
(3) “Implementing agency” means the department, agency or office of the Government which has
jurisdiction over a basic necessity or prime commodity as defined in this Act, which shall be:
(a) The Department of Agriculture, with reference to agricultural crops, fish and other
marine products, fresh meat, fresh poultry and dairy products, fertilizers, and other farm inputs;
(b) The Department of Health, with reference to drugs;
(c) The Department of Environment and Natural Resources, with reference to wood and other
forest products; and
(d) The Department of Trade and Industry, with reference to all other basic necessities and prime
commodities.
(4) “Panic-buying” is the abnormal phenomenon where consumers buy
basic necessities and prime commodities grossly in excess of their normal
requirement resulting in undue shortages of such goods to the prejudice of
less privileged consumers;

(5) “Person” means a natural person or juridical person;

(6) “Prevailing price” means the average price at which any basic necessity
has been sold in a given time within a month from the occurrence of any of
the conditions enumerated under Section 6 of this Act;
(7) “Price ceiling” means the maximum price at which any basic necessity or prime
commodity may be sold to the general public; and

(8) “Prime commodities” include fresh fruits; flour; dried processed and canned
pork; beef and poultry meat; dairy products not falling under basic necessities;
noodles; onions; garlic; vinegar; patis; soy sauce; toilet soap; fertilizer; pesticides;
herbicides; poultry; swine and cattle feeds; veterinary products for poultry, swine
and cattle; paper; school supplies; nipa shingles; sawali; cement; clinker; GI sheets;
hollow blocks; plywood; plyboard; construction nails; batteries; electrical supplies;
light bulbs; steel wire; and all drugs not classified as essential drugs by the
Department of Health.
In a free, unregulated market system, market forces establish equilibrium prices and exchange
quantities.

• While equilibrium conditions may be efficient, it may be true that not everyone is satisfied.
• One of the roles of economists is to use their theories to assist in the development of
policies.

PRICE CONTROLS: LIMITING PRICE MOVEMENTS

• Are usually enacted when policymakers believe the market price is unfair to buyers or sellers.
• Result in government-created price ceilings and floors.
WHY GOVERNMENTS IMPOSE PRICE CONTROLS

1. To help poor
2. For rent subsidies
3. Wage subsidies
4. Due to unfair market income
Price Control Measures:
A price ceiling is the legal maximum price for a good or service.
A price floor is the legal minimum price.

Although both a price ceiling and a price floor can be imposed, the government usually only
selects either a ceiling or a floor for particular goods or services.
PRICE CEILING (PC)

A government-set maximum price that

can be charged for a good or service
• Upper Price Limit
PRICE CEILING (PC)
Since a Price Ceiling (Pc) should be placed below
the equilibrium price, Pe, then Pe becomes illegal.
• Normally in a free market, adjustment will be
through an increase in price, but here it is illegal.
 TWO TYPES OF PRICE CEILING

1. Below equilibrium price – Binding (there is an

effect on free market equilibrium) this causes a
shortage in the market
2. Above the equilibrium - Non binding (No
practical affect)
EFFECTS OF A PRICE CEILING
1. Drop in supply – suppliers can’t supply at the same price
2. Increase in demand – because of the drop of the price
3. This crate a shortage
4. Could create black markets
APPLICATION: LINES AT THE GAS PUMP

In 1973 OPEC raised the price of crude oil in world markets. Because crude oil
is the major input used to make gasoline, the higher oil prices reduced the
supply of gasoline.
What was responsible for the long gas lines?
Economists blame government regulations that limited the
price oil companies could charge for gasoline.
PRICE FLOORS
A government-set minimum price that
can be charged for a good or service
• Lower Price Limit
PRICE FLOORS (Pf)
A Price Floor (Pf) is placed above the equilibrium price, Pe, the
government will penalize those who transact below the Price
Floor (Pf)
• To prevent the adjustment process to cause price to fall,
government may buy the surplus, or sellers will have to absorb it.
EFFECTS OF A PRICE FLOOR
A price floor prevents supply and demand
from moving toward the equilibrium price and
quantity.
• When the market price hits the floor, it can
fall no further, and the market price equals
the floor price.
EFFECTS OF A PRICE FLOOR
An effective price floor causes . . .
• A surplus because QS >QD.
• Nonprice rationing is an alternative mechanism for rationing the
good, using discrimination criteria.
• Examples: The minimum wage, Agricultural price
supports
APPLICATION: THE MINIMUM WAGE

An important example of a price floor is

the minimum wage.
• Minimum wage laws dictate the lowest
price possible for labor that any employer
may pay.
What Is a Black Market?
A black market is economic activity that takes place outside
government-sanctioned channels. Black market transactions usually
occur “under the table” to let participants avoid government price
controls or taxes.
Understanding the Black Market
• Black markets are also the venues where highly controlled substances or
products such as drugs and firearms are illegally traded.
• Black markets can take a toll on an economy since they are shadow markets
where economic activity is not recorded, and taxes are not paid. In the
financial context, the biggest black market exists for currencies in nations
with strict currency controls.
• While most people may shun a black market because they consider it sleazy,
there may be rare occasions when they have no choice but to turn to this
necessary evil.
Key points :
Price ceilings prevent a price from rising above a certain level.
•When a price ceiling is set below the equilibrium price, quantity
demanded will exceed quantity supplied, and excess demand or
shortages will result.
Price floors prevent a price from falling below a certain level.
When a price floor is set above the equilibrium price, quantity supplied
will exceed quantity demanded, and excess supply or surpluses will
result.
• When government laws regulate prices instead of letting market
forces determine prices, it is known as price control.
READ:
https://www.sunstar.com.ph/article/316423/Sports/What-is-the-Price-Act