Price Floor and Ceiling
Government Intervention
At times government will step in and set a limit, high or low on prices.
Price Ceiling
Legal maximum price that sellers may charge for a product.
These are placed on goods that are considered to be too essential for people to be
priced out of the market.
When the price ceiling is placed BELOW the equilibrium it has a binding effect.
The forces of supply & demand want to move the price towards the
equilibrium price, but the market price hits the ceiling and cannot rise
further.
When the government imposes a binding price ceiling in a free market, a shortage
of that good/service is created.
Sellers must ration the scarce resources among the large number of potential
buyers.
College Football Tickets
CMU prints 30,000 tickets for every game
Sells them for $15 each
At that price, 60,000 people want to buy the tickets, so there is a shortage of
30,000 tickets. The university can resolve the problem by letting the price of
tickets rise until QD and SD meet.
But CMU wants to keep tickets affordable to students. The shortage occurs
and scalpers are outside selling them for $50 each.
Price Floor
The legal minimum price that buyers must pay for a product.
When the price floor is set BELOW the equilibrium, the price floor is nonbinding, and has no effect.
When the price floor is set ABOVE the equilibrium it has a binding effect.
The forces of supply & demand want to move the price toward the
equilibrium price, but when the market hits the floor, it cannot fall
further.
When the government imposes a binding price floor in a free market, a surplus of
that good/service is created.
Sellers are unable to provide all that they want at the market or equilibrium
price.
Example: Minimum wage. If minimum wage is set above the equilibrium
price, employers may decide that paying higher wages is not profitable. As a
result, they may choose to employ fewer workers, and unemployment will
increase.
With a price floor, you now have labor supply exceeding the demand for
labor. This causes unemployment. Firms are not willing to hire that many
people at that given price (wage).
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