AP_Krugman_Textbook

module 8 Supply and Demand: Price Controls (Ceilings and Floors) 79

Section 2 Supply and Demand

0 1.6 1.7 1.8 1.9 2.0 2.22.1 2.3 2.4

$1,400

1,300

1,200

1,100

1,000

900

800

700

600

Quantity of apartments (millions)

Monthly rent

(per apartment)

D

E

S

$1,400

1,300

1,200

1,100

1,000

900

800

700

600

2.4

2.3

2.2

2.1

2.0

1.9

1.8

1.7

1.6

1.6

1.7

1.8

1.9

2.0

2.1

2.2

2.3

2.4

Quantity

supplied

Quantity

demanded

Monthly rent

(per apartment)

Quantity of apartments

(millions)

figure 8.1 The Market for Apartments in the Absence of Government Controls

Without government intervention, the market for apart-

ments reaches equilibrium at point Ewith a market rent of

$1,000 per month and 2 million apartments rented.

figure 8.2

The Effects of a

Price Ceiling

The black horizontal line represents the

government-imposed price ceiling on

rents of $800 per month. This price ceil-

ing reduces the quantity of apartments

supplied to 1.8 million, point A,and in-

creases the quantity demanded to 2.2

million, point B.This creates a persistent

shortage of 400,000 units: 400,000 peo-

ple who want apartments at the legal rent

of $800 but cannot get them.

0 1.6 1.8 2.0 2.2 2.4

$1,400

1,200

1,000

800

600

Quantity of apartments (millions)

Monthly rent

(per apartment)

D

S

E

A B

Housing shortage

of 400,000

apartments caused

by price ceiling

Price

ceiling

demanded rises to 2.2 million, 200,000 more than in the unregulated market and
400,000 more than are actually available at the price of $800. So there is now a persistent
shortage of rental housing: at that price, 400,000 more people want to rent than are able
to find apartments.