Price Floor and Ceiling
 Government Intervention
 At times government will step in and set a limit, high or low on prices.
 Price Ceiling
 Legal maximum price that sellers may charge for a product.
 These are placed on goods that are considered to be too essential for people to be
priced out of the market.
 When the price ceiling is placed BELOW the equilibrium it has a binding effect.
 The forces of supply & demand want to move the price towards the
equilibrium price, but the market price hits the ceiling and cannot rise
further.
 When the government imposes a binding price ceiling in a free market, a shortage
of that good/service is created.
 Sellers must ration the scarce resources among the large number of potential
buyers.
 College Football Tickets
 CMU prints 30,000 tickets for every game
 Sells them for $15 each
 At that price, 60,000 people want to buy the tickets, so there is a shortage of
30,000 tickets. The university can resolve the problem by letting the price of
tickets rise until QD and SD meet.
 But CMU wants to keep tickets affordable to students. The shortage occurs
and scalpers are outside selling them for $50 each.
 Price Floor
 The legal minimum price that buyers must pay for a product.
 When the price floor is set BELOW the equilibrium, the price floor is nonbinding, and has no effect.
 When the price floor is set ABOVE the equilibrium it has a binding effect.
 The forces of supply & demand want to move the price toward the
equilibrium price, but when the market hits the floor, it cannot fall
further.
 When the government imposes a binding price floor in a free market, a surplus of
that good/service is created.
 Sellers are unable to provide all that they want at the market or equilibrium
price.
 Example: Minimum wage. If minimum wage is set above the equilibrium
price, employers may decide that paying higher wages is not profitable. As a
result, they may choose to employ fewer workers, and unemployment will
increase.
 With a price floor, you now have labor supply exceeding the demand for
labor. This causes unemployment. Firms are not willing to hire that many
people at that given price (wage).