Price Ceilings & Price Floors

What is a Price Ceiling? A maximum price set by government below the market generated equilibrium price

P A Price Ceiling S P1 Qe Pc Shortage QD QS D Q 3

Why a Price Ceiling? When a price has been rising rapidly, often due to limited supply, the government may want to help the consumers.

What are the economic affects of a price ceiling? Lowers price, lower quantity The ceiling creates a shortage Qd > Qs

With a Price Ceiling what determines who gets the product? Queuing and line tickets Rationing, such as coupons Favoritism Special groupings

What are some examples of Price Ceilings? World War II rationing Rent control in some cities Gas in the late 1970’s

What is a Price Floor? A minimum price set by government above the market equilibrium price

A Price Floor P S Surplus Pf QD QS P1 D Q Qe

What could justify a Price Floor? To help suppliers of a specific good to get a higher price than otherwise would be the case

What could cause a Low Market Price? Supply factors: push the supply curve rightward, reducing price An improvement in technology Bumper Crop Too many sellers

What are the economic effects of a price floor? Raises price, lowers quantity demanded The floor creates a surplus Qd < Qs

What is one problem with Price Floors? What to do with the surplus?

Examples of Price Floors? American agriculture The minimum wage law