1 Chapter 6 Price Ceilings & Price Floors 8/16/2014 © ©1999 South-Western College Publishing Principles of Economics 2nd edition by Fred M Gottheil PowerPoint Slides prepared by Ken Long

2 Note, we only cover pages 126 to 133 in this chapter, just the material on price ceilings and floors

3 What is a Price Ceiling? A maximum price set by government below the market generated equilibrium price © ©1999 South-Western College Publishing

4 D S P Shortage A Price Ceiling 4 QDQD QSQS

5 Why a Price Ceiling? When a price has been rising rapidly, often due to limited supply © ©1999 South-Western College Publishing

6 What are the economic affects of a price ceiling? The ceiling creates a shortage

7 With a Price Ceiling what determines who gets the product? Queuing or some other form of rationing, such as coupons © ©1999 South-Western College Publishing

8 What are some examples of Price Ceilings? World War II Rent control in some cities Gas in the late 1970’s © ©1999 South-Western College Publishing

9 What is a Price Floor? A minimum price set by government above the market equilibrium price © ©1999 South-Western College Publishing

10 D S P Surplus A Price Floor 10 QDQD QSQS

11 What could justify a Price Floor? To help suppliers of a specific good to get a higher price than otherwise would be the case © ©1999 South-Western College Publishing

12 What could cause a Low Market Price? An improvement in technology pushing the supply curve rightward, reducing price © ©1999 South-Western College Publishing

13 S1 S2 P1 Right Shift in Supply P2 Q2 Q1 D 1313 © ©1999 South-Western College Publishing

14 What are the economic effects of a price floor? The floor creates a surplus

15 What is one problem with Price Floors? What to do with the surplus © ©1999 South-Western College Publishing

16 Examples of Price Floors? American agriculture The minimum wage law © ©1999 South-Western College Publishing

17 Agriculture web sites © ©1999 South-Western College Publishing

18 What is a Price Ceiling? What is a Price Floor?