1 Price Ceilings & Price Floors Price Floors 2 What is a Price Ceiling? below the market A maximum price set by government below the market generated.

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Presentation transcript:

1 Price Ceilings & Price Floors Price Floors

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

3 D S PcPc Shortage A Price Ceiling 3 QDQD QSQS P1P1 QeQe P Q

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

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

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

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

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

9 D S PfPf Surplus A Price Floor QDQD QSQS P1P1 QeQe P Q

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

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

12 What are the economic effects of a price floor? Raises price, lower quantity The floor creates a surplus

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

14 Examples of Price Floors? American agriculture The minimum wage law

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