Price Floors & Ceilings

Market Disequilibrium
Price Ceilings and Price
Floors cause market
disequilibrium because
they disrupt the natural
dynamics of the
(supply and demand)
Price Ceiling
 A legal maximum on the price at which a good can be sold.
(if government feels that the price for a good or service is too high)
 Examples: Rent Control for apartments
Electricity (NS Power)…Monopoly
PROS (Purpose)
- Help the poor by making
housing more affordable
- Landlords cannot keep up
with rising costs of
maintenance. (which have
not been frozen)
- Prevent prices from
becoming unreasonably
high…especially in cases
of Monopolies
- Market inefficiency
Case A
No Point in having a price ceiling.
Therefore, it is important to know where
the equilibrium point is before a price
ceiling is established…
Case B
Typical Price Ceiling Scenario
Example – Gasoline Prices.
An increase in the price of crude oil – shifts the supply curve of gasoline to the left
in case (b). This results in a shortage of gasoline (excess demand)…causing
motorists to wait for hours to buy only a few gallons of gas.
Price Floor
 A legal minimum on the price at which a good or
service can be sold.
 Very common example: Minimum Wages
PROS (Purpose)
- Help reduce the amount of
poverty and raise living
standards (avoid sweatshop
- Disrupt market
equilibrium (surpluses)
- Help people keep up with
the rise of inflation (they
raise it from time to time)
- Increases
If left to forces of supply and demand, more workers would be
hired at lower wages.
Price Floor - Surpluses
 Benefits the producers.