Price and Equilibrium Analysis

Imagine walking into a shop and seeing the price of bread fixed by the government.

What might happen next? Would everyone get enough? Would producers be willing to keep supplying it? In this section, you will explore how governments intervene in markets using price floors and price ceilings. You will also investigate how these controls affect prices and quantities and how they can lead to shortages, surpluses, or improved access to basic goods. You are stepping in with valuable economic understanding!

Earlier, you examined how prices are determined through the interaction of supply and demand and how equilibrium is reached. You also explored factors that influence pricing decisions in a free market. These provide the foundation for understanding how price control policies change normal market outcomes and why such measures are sometimes used to protect consumers or producers.

KEY IDEAS

• A price floor is when the government sets a minimum price, such as a minimum wage, to ensure producers or workers receive fair income.

• A price ceiling is when the government sets a maximum price for a good or service, like rent limits, to stop prices from rising too high for consumers.

• Price controls are policies used to protect consumers from high prices or to support producers with guaranteed minimum earnings.

• These controls can disrupt market balance by causing shortages when prices are too low (ceilings) or surpluses when prices are too high (floors).

Price control is a government policy that regulates the prices of goods and services in the market.

In this case, the government sets limits on how high or low prices of goods and services can go. Governments use price control to protect consumers from high prices, ensure basic goods remain affordable, support producers to earn stable income, reduce exploitation in the market, and also control inflation in the economy.

Types of Price Control

There are two main types of price control; Price Floor and Price Ceiling.

Price Floor

A price floor is the lowest legal price the government allows sellers to charge for a product or service. It is usually set above the equilibrium (market) price to help producers, such as farmers, dressmakers, carpenters and manufacturing companies, earn enough income. While it can help producers, it can also lead to excess supply (surplus) if the price is set too high.

Key Features of a Price Floor

1. It is set by the government to ensure that producers receive fair payment for their goods or services.

2. Sellers cannot charge a price below the price floor.

3. It is meant to protect producers like farmers or manufacturers.

4. It can lead to surplus (excess supply) if it is too high.

5. It guarantees producers a minimum income even when market prices fall too low.

Examples of Price Floors

a. Minimum wage: The lowest amount an employer is legally allowed to pay a worker (e.g., the national daily minimum wage in Ghana for 2025 is GH¢19.97).

b. Cocoa price in Ghana: The government sets a minimum price for cocoa to help cocoa farmers earn a good income, even when world prices are low.

What other examples in Ghana will you talk about?

Illustration Let us say the market price (equilibrium price) for a bag of gari is GH¢ 200. The government wants to help gari producers, so it set a minimum price of GH¢ 250 per bag.

What happens?

a. Gari producers are happy and produce more gari (because they earn more per bag).

b. Buyers do not want to buy as much (because GHS 250 is expensive).

c. This causes a surplus – more gari on the market, but fewer people buying it.

The diagram above shows a price floor, where the government sets a minimum price (MIN-P) above the equilibrium price (Pe). At this higher price, the quantity supplied (Q2) exceeds the quantity demanded (Q1), resulting in a surplus in the market.

Activity 6.1 Revision – Market Equilibrium to Price Floor Purpose: The purpose of this activity is to help you understand price and equilibrium analysis and explore government price controls through discussion and research.

Duration: 40 minutes Group Size: Pairs, then whole class Materials needed: Notebook, Pen, Textbook/Phone for research Instructions

Step 1: Price & Equilibrium Recap (10 minutes) Work individually to write brief notes on the following themes:

a. What does price represent in an economy? (3 minutes)

b. List any 3 factors that affect pricing (3 minutes)

c. Explain the relationship between equilibrium price and quantity (4 minutes)

Step 2: Pair work (15 minutes) Think silently about this question: “Have you or someone you know ever complained about prices being too high in Ghana?” (5 minutes)

• Write down your personal experience or a story you have heard about high prices Pair and share your thoughts with a partner:

a. Take turns sharing your experiences (4 minutes each)

b. Why do people complain about high prices? (2 minutes)

Step 3: Price Floor Research (12 minutes) Work in pairs to research and explain:

a. Price Floor (4 Minutes)

b. One Example Of A Price Floor In Ghana (4 Minutes)

c. How Price floor affects consumers and producers (4 minutes)

Step 4: Class Discussion (3 minutes) Quickly share your findings on the price floor with another pair

A price ceiling is the highest price a seller is legally allowed to charge for a product or service. The government sets this price below the market (equilibrium) price to make important goods more affordable for everyone and is especially for people with lower incomes.

Key Features of a Price Ceiling

₁. It is set by the government to stop prices from rising too high.

2. Sellers cannot charge above the set price.

3. It helps to protect consumers, especially during tough times like economic hardship or inflation.

4. If the ceiling is set too low, it can lead to shortages (excess demand) because demand becomes higher than supply.

Examples in Ghana

ₐ. Electricity tariffs for lifeline consumers (those who use less power) are kept low to support poor households.

b. Maize and rice price controls during food shortages to make staple foods affordable.

c. Transport fares may be regulated during times of fuel price hikes to protect passengers.

Illustration Imagine the equilibrium price of a bag of cement is GHS 80, but due to high building costs, the government places a price ceiling at GHS 60 to help people build houses.

What happens?

i. Consumers would want to buy more cement because it is cheaper.

ii. Producers would not be willing to sell more because they would make less profit.

iii. It will cause a shortage, that is, many people want to buy, but there will not be enough cement available.

The diagram above shows a price ceiling, where the government sets a maximum price (MAX-P) below the equilibrium price (Pe) to make goods more affordable. At this lower price, quantity demanded (Q2) is greater than the quantity supplied (Q1), causing a shortage in the market.

Activity 6.2 Understanding Price Ceiling

Purpose: The purpose of this activity is to help you explore price ceilings and understand when low prices can be problematic, through discussion and research.

Duration: 25 minutes Group Size: Pairs, then whole class Materials needed: Notebook, Pen, Textbook/Phone for research Instructions

Step 1: Individual reflection (15 minutes) Think silently about this question: “Have you or someone you know ever complained about prices being too low in Ghana?”

• Write down some examples you know [e.g., suspicion of counterfeit goods (fake electronics), street food much cheaper than it usually is (hygiene standards), unethically sourced goods (child labour)] Pair and share your thoughts with a partner:

Take turns sharing your experiences (3 minutes each) Discuss: When can a price ceiling cause problems due to low prices? (1 minute) Share (3 minutes) Volunteers share ideas on a and b with the class

Step 2: Price Ceiling Research (8 minutes) Work in pairs to research and find answers to the following questions:

a. What is a price ceiling? (3 minutes)

b. Identify at least two examples of price ceilings in Ghana (3 minutes)

c. How does the price ceiling affect consumers and producers? (2 minutes)

Step 3: Share your findings with another pair in the class. (2 minutes) Summary of the Impact of Price Floor and Price Ceiling on the Economy Problems of Price Controls ₁. It leads to shortages (Under Price Ceilings): When the government sets prices below the equilibrium price, demand exceeds supply. This creates a shortage in the market. For example, in 2022, fuel shortages happened in some parts of Ghana when fuel prices were controlled and not allowed to reflect global price increases.

2. It leads to surpluses (Under Price Floors): When the government sets prices above the equilibrium price, producers supply more, but buyers want less. This leads to an excess supply, causing a surplus in the market. For example, if the government of Ghana sets a high price for maize to support farmers, they may produce too much maize, but not all of it will be bought. What will happen to the surplus? Think about it.

3. There will be Black Marketing: When goods are scarce due to price controls, illegal markets may form, where products are sold at high prices secretly. This defeats the government’s efforts and may lead to inequality. For example, during LPG gas shortages in Ghana, some people sell it secretly at higher prices.

4. It can lead to poor product quality: If sellers cannot increase prices during price ceilings, they may lower the quality of the product to cut costs. For example, if rent is controlled in Accra, landlords may not fix broken facilities because they will not make enough money from rent.

5. It may lead to the misuse of resources (Distorted Resource Allocation): When prices do not reflect real demand, producers may keep making goods that are not needed much. For example, if cocoa prices are fixed too high, farmers may overproduce cocoa, even if global demand for cocoa is falling.

6. There will be unemployment: If minimum wages are set too high, some businesses may not be able to employ workers, especially those with little experience. For

example, a small shop in Tamale may not hire more workers if they must pay each shop attendant a high wage.

7. It brings corruption and favouritism: When goods are in short supply, some people may give bribes or use ‘connections’ to get them, instead of following fair procedures. For example, during fertiliser shortages, some farmers may get supplies early because they know someone in the Ministry of Agriculture.

Positive Effects of Price Floors

₁. It protects producers: It helps farmers and manufacturers to earn a minimum amount, which prevents them from a loss of profit when prices are very low.

2. It encourages production: It helps boost supply in important sectors such as agriculture. For example, setting a high price for yams can encourage more farmers to grow them.

3. It improves the living standards of workers: With better earnings, workers or farmers can take care of their families and meet basic needs.

Negative Effects of Price Floors

1. There will be surpluses where more goods are produced than people can buy.

2. It will cause unemployment if wages are too high for employers to pay or hire.

3. It can burden the government when it has to buy unsold or surplus goods from the market to maintain the price.

4. There will be inefficient use of resources if producers keep making products that do not sell well. This will cause wastage.

Positive Effects of Price Ceilings

1. It protects consumers by making essential goods available at lower prices.

2. It increases access to important goods like medicine, housing, and fuel.

3. It helps to control inflation in times of increased aggregate demand.

4. It prevents sellers from taking advantage of consumers during shortages or emergencies.

5. It helps low-income households to afford necessities they might otherwise be unable to buy if prices were high.

Negative Effects of Price Ceilings

1. It creates shortages as demand exceeds supply.

2. It can lead to black markets where goods may be sold secretly at higher prices.

3. Producers or sellers may produce low-quality goods to save costs. For example, tenants may get poor services in rented rooms because landlords earn less.

4. This might cause a decrease in production if profits are too low for producers and service providers.

Activity 6.3 Price Control Effects Discussion

Purpose: The purpose of this activity is to help you understand the effects of price controls through quote analysis and sharing in your partner’s ideas.

Duration: 30 minutes Group Size: Pairs Instructions

Step 1: Individual Analysis (8 minutes) Individually read these quotes and brainstorm Quotes:

a. Farmer: “The government price for maize is high, but now I can’t sell much.”

b. Consumer: “I cannot find cooking oil anymore. The price is low, but it is always out of stock.”

c. Fuel seller: “Since the price is fixed, I sell secretly at a higher price to make more profit.”

Write down in your notebook:

a. What price control problem is shown in each quote above? (4 minutes)

b. What can the government do in each case? (4 minutes)

Step 2: Pair Discussion (18 minutes)

a. Share your analysis with your partner (6 minutes)

b. Add your opinion and experiences with any of the quotes above (6 minutes)

c. Build on your partner’s ideas respectfully (6 minutes)

Step 3: Personal Reflection (4 minutes) Write down:

a. Main points you agree with your partner and why

b. Main points you disagree with your partner and why

Activity 6.4 Market Structure Summary - Enoch’s Business Journey Purpose: The purpose of this activity is to help you recall key concepts about market structures through a simple business scenario.

Duration: 15 minutes Group Size: Individual work, then pair sharing Instructions

Step 1: Individual task (10 minutes) Read the scenario carefully and write one word or a short response to the questions below.

Scenario: Enoch’s Business Journey

Enoch began selling sachet water in his area with no competition. He made supernormal profits and could set prices freely. Later, many sellers joined, selling identical brands of the sachet water at the same price. The profit for Enoch and other sellers fell to normal levels. Finally, Enoch switched to selling different kinds of flavoured drinks. Now he competes with a few sellers offering slightly different varieties, making normal profits. The government sometimes sets maximum prices for basic goods to help consumers.

Questions

1. When Enoch initially started the sachet water business, what market structure was he operating? (One word)

2. What type of profit did Enoch make initially? (One word)

3. When many sellers joined in selling identical products, what market structure is it referring to? (Two words)

4. What profit do sellers make in perfect competition? (One word)

5. Enoch’s current flavoured drinks market is called? (Two words)

6. What are government maximum prices called? (Two words)

7. The law that shows the price and quantity supplied relationship is called?

(Three words)

8. When supply is very responsive to price changes, it is? (One word)

Step 2: Pair and compare your answers with a partner and discuss any differences (4 minutes)

Step 3: Agree with your pair and write the correct answers in your notebook.