Economics » Demand and Supply » Price Ceilings and Price Floors

Key Concepts and Summary

Key Concepts and Summary

Price ceilings prevent a price from rising above a certain level. When a price ceiling is set below the equilibrium price, quantity demanded will exceed quantity supplied, and excess demand or shortages will result. Price floors prevent a price from falling below a certain level. When a price floor is set above the equilibrium price, quantity supplied will exceed quantity demanded, and excess supply or surpluses will result. Price floors and price ceilings often lead to unintended consequences.

Glossary

price ceiling

a legal maximum price

price control

government laws to regulate prices instead of letting market forces determine prices

price floor

a legal minimum price

total surplus

see social surplus

Review Questions

  1. Does a price ceiling attempt to make a price higher or lower?
  2. How does a price ceiling set below the equilibrium level affect quantity demanded and quantity supplied?
  3. Does a price floor attempt to make a price higher or lower?
  4. How does a price floor set above the equilibrium level affect quantity demanded and quantity supplied?

Problems

A low-income country decides to set a price ceiling on bread so it can make sure that bread is affordable to the poor. The conditions of demand and supply are given in the table below. What are the equilibrium price and equilibrium quantity before the price ceiling? What will the excess demand or the shortage (that is, quantity demanded minus quantity supplied) be if the price ceiling is set at $2.40? At $2.00? At $3.60?

PriceQdQs
$1.609,0005,000
$2.008,5005,500
$2.408,0006,400
$2.807,5007,500
$3.207,0009,000
$3.606,50011,000
$4.006,00015,000

Critical Thinking Questions

  1. Most government policy decisions have winners and losers. What are the effects of raising the minimum wage? It is more complex than simply producers lose and workers gain. Who are the winners and who are the losers, and what exactly do they win and lose? To what extent does the policy change achieve its goals?
  2. Agricultural price supports result in governments holding large inventories of agricultural products. Why do you think the government cannot simply give the products away to poor people?
  3. Can you propose a policy that would induce the market to supply more rental housing units?

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