Microeconomics - Price Ceilings and Floors
Price Ceilings
If the price ceiling is above the market price, then there is no direct effect. If the price ceiling is set below the market price, then a
"shortage" is created; the quantity ________ will exceed the quantity _________. The shortage may be resolved in many ways. One
way is "queuing" or first come first _____; people have to wait in _____ (either literally or figuratively) for the product, and only
those willing to wait in line for the product will actually get it. Sellers might provide the product only to family and friends, or those
willing to pay extra "under the table". Another effect may be that sellers will ______ the quality of the good sold. "Black markets"
tend to be created by price ceilings.
Figure 3.6: Effect of Price Ceilings
Figure 3.6 illustrates the shortage that occurs when a price ________ is
imposed on suppliers. Consumers demand QD while Suppliers are only willing
to supply QS. If the price ceiling is set ________ the equilibrium, consumers
would demand a smaller quantity than suppliers are producing.
Provide two examples of products where a price ceiling is in place below the
Equilibrium Price:
1.
2.
Price Floors
When a "price floor" is set, a certain ___________ amount must be paid for a good or service. If the price floor is _______ a market
price, no direct effect occurs. If the market price is lower than the price floor, then a surplus will be generated. Minimum wage laws
are good examples of price floors. In many states, the U.S. minimum wage law has no effect, as market wage rates for low-skilled
workers are _______ the U.S. minimum wage rate. In states where the minimum wage is above the market wage rate, the law will
increase unemployment for low-skilled workers. Although some low-skilled workers will get higher pay, others will lose their jobs.
List 2 States where you think the minimum wage is above the market wage. Why is this and what affect does it have on jobs?
A price floor set ________ the market price has no practical effect. When a price floor is set above the market equilibrium price it
has several side-effects. Consumers find they must now pay a _______ price for the same product. As a result, they ________ their
purchases or drop out of the market entirely. Meanwhile, suppliers find they are guaranteed a new, higher price than they were
charging before. As a result, they _________ production.
Draw a supply & demand graph with a price floor above the market, or equilibrium price:
Price
Quantity
Provide another example of a price floor and state if it is above or below the equilibrium price:
Elasticity
1)
2)
Which of the following items are price elastic or price inelastic? And why?
 Salt

Can of Campbell’s soup

A Chevy Cavalier

A Round the World Cruise

Insulin

Insulin at one of four drug stores in a mall

Packet of Wrigley’s Spearmint Gum
The state of Texas raised the price of personalized license plates from $35 to $70. The state’s revenue from
personalized license plates fell. What can you say about the price elasticity of demand for plates from this
information?
3) Using your knowledge of elasticity, examine the goals and results of government excise taxes, also known as “sin
taxes” on the following items.
 Cigarettes

Alcohol

Carbonated Beverages (proposed)
Draw a supply & demand graph of elasticity (A) and one for a product (B) that has a 10% P with 5% D
A)
B)
Price
Price
Quantity
Quantity