Price Ceilings & Price Floors Mr. Marinello * Chippewa Valley * Fall 2012

 Government Intervention  At times government will step in and set a limit, high or low on prices.  Price Ceiling  Legal maximum price that sellers may charge for a product.  These are placed on goods that are considered to be too essential for people to be priced out of the market.

 When the price ceiling is placed BELOW the equilibrium it has a binding effect.  The forces of supply & demand want to move the price towards the equilibrium price, but the market price hits the ceiling and cannot rise further. S1 D1 Binding Shortage

 When the government imposes a binding price ceiling in a free market, a shortage of that good/service is created.  Sellers must ration the scarce resources among the large number of potential buyers.  College Football Tickets  CMU prints 30,000 tickets for every game  Sells them for $15 each  At that price, 60,000 people want to buy the tickets, so there is a shortage of 30,000 tickets. The university can resolve the problem by letting the price of tickets rise until QD and SD meet.  But CMU wants to keep tickets affordable to students. The shortage occurs and scalpers are outside selling them for $50 each.

Price Floor  The legal minimum price that buyers must pay for a product.  When the price floor is set BELOW the equilibrium, the price floor is non-binding, and has no effect. S1 D1

When the price floor is set ABOVE the equilibrium it has a binding effect. i.The forces of supply & demand want to move the price toward the equilibrium price, but when the market hits the floor, it cannot fall further. S1 D1 Surplus Binding

 When the government imposes a binding price floor in a free market, a surplus of that good/service is created.  Sellers are unable to provide all that they want at the market or equilibrium price.

 Example: Minimum wage. If minimum wage is set above the equilibrium price, employers may decide that paying higher wages is not profitable. As a result, they may choose to employ fewer workers, and unemployment will increase.  With a price floor, you now have labor supply exceeding the demand for labor. This causes unemployment. Firms are not willing to hire that many people at that given price (wage).