Economics / Unit 4: Supply and Market Equilibrium
4.6 Price Ceilings and Price Floors
Notes
Governments sometimes set legal limits on prices.
- A price ceiling is a maximum legal price. It matters only if set below equilibrium, and it causes a shortage. Example: rent control in some cities.
- Shortages can lead to waiting lists, lower quality, rationing and black markets (illegal sales above the legal price).
- A price floor is a minimum legal price. It matters only if set above equilibrium, and it causes a surplus. Examples: the minimum wage (a floor on the price of labor) and some agricultural price supports.
- Using the table in 4.4: a ceiling of $3 creates a shortage of $750 - 450 = 300$ units. A floor of $5 creates a surplus of $750 - 450 = 300$ units.
- Supporters say these controls protect renters, workers or farmers. Critics say they cause shortages or surpluses and that other policies would help the same groups at lower cost. Economists study the size of these effects, which can vary from market to market.
Practice
A city caps apartment rent at $900 a month when the equilibrium rent is $1,200. The most likely result is:
A ceiling below equilibrium raises quantity demanded and lowers quantity supplied.
The government sets a minimum price for milk above the equilibrium price. This is a price:
A legal minimum above equilibrium leaves more milk offered than buyers want.
The equilibrium price of a concert ticket is $80. A law sets a price ceiling of $100. What effect does the ceiling have?
A ceiling only matters if it is below equilibrium; here the market price of $80 is already legal.
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