Price floor and price ceilings

Price floor and price ceilings

Lessons


Price Ceilings


Price Ceiling: a government law that makes it illegal to charge higher than the specified price.


Two things can happen when a price ceiling is implemented.


Case 1: The price ceiling is above  the equilibrium price. In this case there is no effect on anything, and the equilibrium price and quantity stay the same.


Price ceiling above equilibrium price

Case 2: The price ceiling is below  the equilibrium price. In this case, there will be an underproduction of the quantity supplied, and a higher willingness to pay from consumers. This decreases the economic surplus and creates deadweight loss.


Price ceiling below equilibrium price

Problems with Rent Ceiling
  1. Shortage of Housing
  2. Creates a Black Market
  3. Increased Search Activity

Price Floor


Price Floor: a government law that makes it illegal to charger lower than the specified price.


Two things can happen when a price floor is implemented.


Case 1: The price ceiling is below  the equilibrium price. In this case there is no effect on anything, and the equilibrium price and quantity stay the same.


Price floor below equilibrium price

Case 2: The price ceiling is above  the equilibrium price. In this case, there will be an overproduction of the quantity supplied, and a lower willingness to pay from consumers. This decreases the economic surplus and creates deadweight loss.


Price floor above equilibrium price

Problems with Price Floor
  1. Surplus of labour & unemployment
  2. Job Searching
  • Introduction
    Price Floors and Price Ceilings Overview:
    a)
    Price Ceilings
    • Definition of Price Ceiling
    • 2 Cases for Price Ceiling
    • Problems with Rent Ceiling
    • An Example

    b)
    Price Floor
    • Definition of Price Floor
    • 2 Cases for Price Floor
    • Problems with Price Floor
    • An Example