What Happens With a Maximum or Minimum Price?
Learn when maximum and minimum prices cause shortages or surpluses, why the equilibrium price matters, and how buyers and sellers are affected.
A maximum price sets the highest legal price a seller can charge. If it is below the market equilibrium price, it usually creates a shortage: buyers want more than sellers are willing to supply. A minimum price sets the lowest legal price. If it is above equilibrium, it usually creates a surplus: sellers want to supply more than buyers want to purchase.
Why the position matters
The equilibrium price is where the quantity demanded equals the quantity supplied. A price control is binding when it prevents the market from reaching that price. A maximum price above equilibrium, or a minimum price below equilibrium, does not change the market outcome.
For example, suppose a product’s equilibrium price is 101010 per unit. At a maximum price of 888, buyers demand 120120120 units but sellers supply only 808080. The shortage is 120−80=40120-80=40120−80=40 units. If instead the government sets a minimum price of 121212, and sellers supply 120120120 units while buyers demand 808080, the surplus is 120−80=40120-80=40120−80=40 units. These figures are illustrative; the actual quantities depend on the market’s demand and supply.
Who is affected?
A maximum price can make a good more affordable for buyers who obtain it, but some buyers may be unable to find it. A minimum price can raise the price received by sellers who make sales, but others may be left with unsold output. Neither outcome means every buyer or seller benefits.
Common exam mistake: do not say that every maximum price causes a shortage or every minimum price causes a surplus. First compare the legal price with the equilibrium price. This is the AS Level content on maximum and minimum prices in Government microeconomy intervention (3.2.43.2.43.2.4), which A Level students also study.
