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minimum
price
(or 
price floor
) for a good. The EU Common Agricultural Policy 
(CAP) is an example of a price floor, aimed to ensure that farmers receive at least the minimum 
prices for their produce. 
(i) Public transport 
(ii) Used vehicles market 
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CHAPTER 4
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MICROECONOMIC FACTORS 
 
113 
8.2 Maximum prices
The Government may try to prevent prices of goods rising by establishing a price ceiling 
below
the 
equilibrium price. (Note: the price ceiling has to be below the equilibrium price. If the price ceiling is 
higher than the equilibrium price, setting a price ceiling will have no effect at all on the operation of 
market forces. Make sure that you understand why this is so.) 
If the maximum price M is lower than what the equilibrium price would be, there will be an excess of 
demand over supply (Figure 13). The low price attracts customers, but deters suppliers. Because the 
price ceiling M is below the equilibrium price P, producers will reduce the quantity of goods supplied to 
the marketplace from Q to A. However, the quantity demanded will increase from Q to B because of the 
fall in price. The excess quantity demanded is AB.
Because the market is now in disequilibrium, the limited supply has to be allocated by a means other 
than price. 
To prevent an unfair allocation of the units of the good that are available, the Government might have to 
introduce 
rationing
(as with petrol coupons) or a 
waiting list
(as for local authority housing). Rationing 
and 
black marketeers
 
tend to go together. In Figure 13 consumers demand quantity B but can only get 
A. However, for quantity A they are prepared to pay price Z, which is well above the official price M. The 
black marketeers step in to exploit the gap. The commodity may be sold on ration at the official price M, 
but black marketeers may sell illicit production at price Z. 
Note also that maximum prices can lead to a misallocation of resources. Producers will reduce output of 
the products subject to price controls because they are now relatively less profitable than those products 
not subject to price controls. 
Price
Maximum price
Quantity
A
Q
B
P
Z
M
Equilibrium price
S
D
Figure 13 Maximum price below equilibrium price