1. Price floors & Price ceilings
Take out Worksheet from Yesterday
Hand in Quiz Correction if you have them
TEST ON MONDAY

2. Today’s Agenda
Objective: To understand the affect of price ceilings and price floors upon the market.
Essential Skill: State implications and consequences
Focus:
What are price ceilings and price floors? What are some examples of each?
How do price ceilings and price floors affect market outcomes?

3. Government Policies Price controls
Price ceiling: a legal maximum on the price of a good or service. Example: rent control.
Price floor: a legal minimum on the price of a good or service. Example: minimum wage.

4. To Remember Ceiling- Below Equilibrium- Shortage- Benefits Buyers
Floor-Above Equilibrium- Surplus- Benefits Sellers

5. EXAMPLE 1: The Market for ApartmentsQ
Rental price of apts S D
$800
300
Eq’m w/o price controls
Quantity of apartments

6. How Price Ceilings Affect Market Outcomes
A price ceiling above the equilibrium price is not binding – it has no effect on the market outcome. P Q S
Price ceiling
$1000 D
$800
300

7. How Price Ceilings Affect Market Outcomes
The equilibrium price ($800) is above the ceiling and therefore illegal.
The ceiling is a binding constraint on the price, and causes a shortage. P Q S D
$800
Price ceiling
$500
250
400
shortage

8. EXAMPLE 2: The Market for Unskilled LaborW L
Wage paid to unskilled workers S D $4
500
Equilibrium w/o price controls
Quantity of unskilled workers

9. How Price Floors Affect Market Outcomes
A price floor below the equilibrium price is not binding – it has no effect on the market outcome. W L S D $4
500
Price floor $3

10. How Price Floors Affect Market Outcomes
labor surplus
The equilibrium wage ($4) is below the floor and therefore illegal.
The floor is a binding constraint on the wage, and causes a surplus (i.e., unemployment). W L S
Price floor $5 D
400
550 $4

11. Price floors & ceilingsQ P S
The market for hotel rooms D
Determine effects of:
A. $90 price ceiling
B. $90 price floor
C. $120 price floor 11

12. The market for hotel rooms
A. $90 price ceiling Q P S
The market for hotel rooms D
The price falls to $90.
Buyers demand 120 rooms, sellers supply 90, leaving a shortage.
Price ceiling
shortage = 30 12

13. The market for hotel rooms
B. $90 price floor Q P S
The market for hotel rooms D
Eq’m price is above the floor, so floor is not binding.
P = $100, Q = 100 rooms.
Price floor 13

14. The market for hotel rooms
C. $120 price floor Q P S
The market for hotel rooms D
The price rises to $120.
Buyers demand 60 rooms, sellers supply 120, causing a surplus.
surplus = 60
Price floor 14

15. Effects of Price Controls
Prices are the signals that guide the allocation of society’s resources. This allocation is altered when policymakers restrict prices.
Price controls are often intended to help the poor, but they often hurt more than help them:
The min. wage can cause job losses.
Rent control can reduce the quantity and quality of affordable housing.

16. To Study: Demand Supply Market Equilibrium Single and Double Shifts
Price Floor and Price Ceiling
Know your shifters
Know how to draw and label ALL graphs
Know definitions from your book notes