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Double shifts and price controls

Real markets rarely get one shock at a time. This page covers two shocks at once, rules that cap or prop up prices, and two elasticity tools for reading the result.

When both curves shift

A single shift gives a certain answer for both price and quantity. With two shifts at once, one outcome is certain and the other depends on which shift is bigger, which you can't tell without magnitudes.

Price ceilings

A ceiling is a legal maximum price. It only bites when it is set below the equilibrium price. Then quantity demanded exceeds quantity supplied, producing a shortage that gets rationed by queues, connections or black markets. Rent control is the classic example. A ceiling set above equilibrium changes nothing.

Price floors

A floor is a legal minimum price. It only bites when it is set above equilibrium. Then quantity supplied exceeds quantity demanded, leaving a surplus. Agricultural price supports and a minimum wage in a competitive labour market are standard examples.

Both kinds of control create a deadweight loss: some trades that would have benefited buyer and seller no longer happen.

Two elasticity tools

• The total revenue test. If a price rise increases total revenue, demand is inelastic; if revenue falls, demand is elastic.
• Cross-price elasticity. Positive for substitutes (coffee and tea), negative for complements (coffee and cream), close to zero for unrelated goods. It tells you which way a change in one good's price shifts demand for another.

Common exam traps

• Claiming both price and quantity are certain after two shifts.
• Drawing a ceiling above equilibrium and expecting a shortage.
• Confusing a shift of a curve with a movement along it.
• Reversing the sign of cross elasticity for complements and substitutes.

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