6.1 Controls on Prices

6.1 a. Price Ceilings

A price ceiling is the maximum price a seller is allowed to charge for a product or service. Price ceilings are usually set by law and limit the seller pricing system to ensure fair and reasonable business practices. Price ceilings are linked to shortages as if too many consumers can afford a good, they may all buy it, and supplies may fall short and also because producers lower their supplies because of loss in gains from trade. ^[1]

Example: The prices of housing in cities with rent control and shortages in the number of apartments. ^[1]

^{Price Ceilings [2]}

6.1 b. Price Floors

A price floor is the lowest amount at which a good or service may be sold and still function within the traditional supply and demand model. If the price floor is below a market price, no direct effect occurs. If the market price is lower than the price floor, then a surplus will be generated. ^[3]

Example: In states where the minimum wage is above the market late, the law will increase unemployment for low-skilled workers.

^{Price Floors [4]}

6.1 c. Evaluating Price Controls

A price ceiling is only effective when set BELOW the equilibrium price. At the price ceiling, the quantity demanded is greater than quantity supplied, which indicates a shortage situation. The amount exchanged in the market will be limited by the smaller of the two quantities. If a price ceiling is set above the equilibrium price, the market will continue to operate at equilibrium. ^[11]

A price floor is only effective when set ABOVE the equilibrium price. At the price floor, the quantity demanded is less than quantity supplied, which is a surplus situation. The amount exchanged in the market will be limited by the smaller of the two quantities. When the price floor is set below the equilibrium price, the market will continue to operate at its equilibrium price. ^[11]

^{Price Controls [10]}