This section uses the demand and supply framework to analyze price ceilings.
Effective price ceilings and price floors.
When a price ceiling is set below the equilibrium price quantity demanded will exceed quantity supplied and excess demand or shortages will result.
Price ceilings and price floors can be either effective or ineffective.
Laws that government enact to regulate prices are called price controls.
Price ceiling price floor effective and ineffective.
When the price is above the equilibrium the quantity supplied will be greater than the quantity demanded and there will be a surplus.
It is legal minimum price set by the government on particular goods and services in order to prevent producers from being paid very less price.
As a result many people called for price controls on bottled water to prevent the price from rising so high.
The next section discusses price floors.
A government imposes price ceilings in order to keep the price of some necessary good or service affordable.
Price floors and price ceilings are government imposed minimums and maximums on the price of certain goods or services.
They each have reasons for using them but there are large efficiency losses with both of them.
When price floors are imposed consumer surplus decreases and producer surplus increases.
When price ceilings are imposed consumer surplus increases and producer surplus decreases.
Price floors and price ceilings are price controls examples of government intervention in the free market which changes the market equilibrium.
Implementing a price floor.
This section uses the demand and supply framework to analyze price ceilings.
For example in 2005 during hurricane katrina the price of bottled water increased above 5 per gallon.
Like price ceiling price floor is also a measure of price control imposed by the government.
A price ceiling keeps a price from rising above a certain level the ceiling while a price floor keeps a price from falling below a certain level the floor.
This is usually done to protect buyers and suppliers or manage scarce resources during difficult economic times.
But this is a control or limit on how low a price can be charged for any commodity.
As you learned in the lessons above any price set above the equilibrium price is an ineffective price ceiling but is an effective price floor and any price set below the equilibrium price is an ineffective price floor and an effective price ceiling.
When society or the government feels that the price of a commodity is too low policymakers impose a price floor establishing a minimum price above the market equilibrium.
Price ceilings prevent a price from rising above a certain level.
