Note: This is post #21 in a weekly video series on basic microeconomics.
President Nixon had a problem—inflation was out of control. So in 1971 he attempted to implement a drastic solution: he declared price increases illegal.
Because prices couldn’t increase, they began hitting a ceiling. With a price ceiling, buyers are unable to signal their increased demand by bidding prices up, and suppliers have no incentive to increase quantity supplied because they can’t raise the price. This video by Marginal Revolution University shows what happens when prices aren’t allowed to coordinate global economic activity.
(If you find the pace of the videos too slow, I’d recommend watching them at 1.5 to 2 times the speed. You can adjust the speed at which the video plays by clicking on “Settings” (the gear symbol) and changing “Speed” from normal to 1.25, 1.5 or 2.)
Previous in series: Can prices predict the future?