Transcript Price ceilings and floors

Price Ceilings
and
Price Floors
How market prices are
“distorted” by Government
Policies
Supply/Demand and Government Policies--Price Ceilings and Price Floors
In a free, unregulated market system,
market forces establish equilibrium prices
and quantities.
 While equilibrium conditions may be
efficient, not everyone will be satisfied
with prevailing market price (either too
high or too low)
 Price controls are usually implemented
when it is perceived that the market price
is unfair to either buyers OR sellers

Supply/Demand and Government Policies--Price Ceilings and Price Floors

Price Ceiling
◦ A legal maximum on the price at which a good
can be sold.

Price Floor
◦ A legal minimum on the price at which a good
can be sold.

We are going to examine a PRICE
CEILING first…
Supply/Demand and Government
Policies---Price Ceilings and Price
Floors

Two outcomes are possible when the
government imposes a price ceiling:
◦ The price ceiling is not binding if set above the
equilibrium price.
◦ The price ceiling is binding if set below the
equilibrium price, leading to a shortage
S*
Price
Of
___
Pe
Pceiling
D*
Qs
Qe
Qd
Quantity of _____________
If a market price is deemed to be too high, the government can impose a PRICE
CEILING. This happened in the 1970’s when we experienced rapid inflation and state and
Local governments often threaten to impose price ceilings when natural disasters occur .
S*
Price
Of
___
Pe
Pceiling
D*
Qs
Qe
Qd
Quantity of _____________
With the Price at Pceiling, we now find the market will Supply Qs but Demand Qd…The
Market is in Dis-equalibrium. DEMAND IS GREATER THAN SUPPLY!!!
S*
Price
Of
___
Pe
Pceiling
D*
Qs
Qe
Qd
Quantity of _____________
Because the Price is a binding Price Ceiling, it cannot go higher…There will be shortages
In this market
S*
Price
Of
___
Pe
The Price WANTS to Push Up through
The Price Ceiling to get to the Market
Equilibrium price Pe.
Pceiling
D*
Qs
Qe
Qd
Quantity of _____________
S*
Price
Of
___
Pe
Think of it as trying to push through
The ceiling of your house to get the
“peak”….
Pceiling
D*
Qs
Qe
Qd
Quantity of _____________
S*
Price
Of
___
Pe
Pceiling
Shortage
D*
Qs
Qe
Qd
Quantity of _____________
With the Price Ceiling there will be SHORTAGES OF THE GOOD
PRICE FLOOR
A Price Floor is a government imposed
price that is ABOVE the prevailing Market
Price.
 For a particular industry (or group of
people) the market price is considered too
low)
 Minimum Wage and Agricultural
Commodities (wheat, corn, ect) are
common targets for price floor
implementation

Market for ______
S*
Price
Of
___
PPFloor
e
D*
Qd
Qe
Qs
Quantity of _____________
If the market price is too low then the government may impose a
Price Floor so that the recipient of the good or service (supplier)
can receive a higher price than they otherwise would receive.
Market for ______
S*
Price
Of
PFloor
___
Pe
D*
Qd
Qe
Qs
Quantity of _____________
At the price Pfloor the market is in disequilibrium, Quantity Demanded
Is LESS THAN Quantity Supplied.
Market for ______
Price
Of
PFloor
___
Pe
S*
The Market is trying
To push the price
Down to Pe but the
Binding Price Floor
Will not allow it.
D*
Qd
Qe
Qs
Quantity of _____________
At the price Pfloor the market is in disequilibrium, Quantity Demanded
Is LESS THAN Quantity Supplied.
Market for ______
Price
Of
PFloor
___
Pe
S*
Think of this as Stomping on
The FLOOR to get DOWN to
The Market Price.
D*
Qd
Qe
Qs
Quantity of _____________
At the price Pfloor the market is in disequilibrium, Quantity Demanded
Is LESS THAN Quantity Supplied.
Market for ______
Price
Of
PFloor
___
S*
Surplus
Pe
D*
Qd
Qe
Qs
Quantity of _____________
At the price Pfloor the market is in disequilibrium, Quantity Demanded
Is LESS THAN Quantity Supplied. There will be a SURPLUS of this
Good or Service in this Market.
Market for ______
Price
Of
PFloor
___
S*
Surplus
Pe
D*
Qd
Qe
Qs
Quantity of _____________
If this were an agricultural commodity, farmers would tend to OVER
PRODUCE. In this case the Federal Govt usually BUYS the commodity
From the farmers and either stockpiles it OR uses it for foreign food aid.
Market for ______
Price
Of
PFloor
___
S*
Surplus
Pe
D*
Qd
Qe
Qs
Quantity of _____________
The govt were to set the Minimum Wage at Pfloor and the prevailing
Market wage COULD BE Pe, then there would be a SURPLUS of Labor,
Which means there will HIGHER unemployment than there “normally”
Would be WITHOUT the Price Floor.
Bottom Line on Price Ceilings and
Price Floors
They distort the market price for a good
or service.
 Usually imposed for a political reason and
are not necessarily “Bad OR Good”…
 Benefits are concentrated and Costs
are dispersed…
