Price ceiling a legislated priceset lower than the

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Unformatted text preview: . Section 1 Supply and Demand Together 137 06 (128-153) EMC Chap 06 11/21/05 3:13 PM Page 138 What Are Price Controls? price ceiling A legislated price—set lower than the equilibrium price—above which buyers and sellers cannot legally buy and sell a good. price floor A legislated price—set above the equilibrium price—below which buyers and sellers cannot legally buy and sell a good. Sometimes government prevents markets from reaching an equilibrium price. For example, suppose that the equilibrium price for a good is $10. It is possible for government officials to pass a law setting the price lower—say, $8. A legislated price that is below the equilibrium price is called a price ceiling. A price ceiling is like a ceiling in a room. Just as you cannot go higher than the ceiling in a room, buyers and sellers cannot legally buy and sell a good for a price higher than the price ceiling. Government could, and sometimes does, legislate a higher (than equilibrium) price— say, $12. A legislated price that is above the equilibrium price is called a price floor. A price floor is like a floor in a room. Just as you cannot go lower than the floor in a room, buyers and sellers cannot legally buy and sell a good for a price lower than the price floor. Let’s look at both a price ceiling and price floor graphically. In Exhibit 6-5(a) we show a price ceiling. In the exhibit, $10 is the equilibrium price of the good. You will also notice that the equilibrium quantity is 80. The price ceiling of $8 is below the equilibrium price. What is an effect of the price ceiling? One effect is that a price ceiling creates a shortage EXH I BIT 6 -5 in the market. Notice that at $8, quantity demanded (100) is greater than quantity supplied (60), which is the definition of a shortage. Because suppliers only want to supply 60 units at $8, only 60 units are bought and sold. (Sure, buyers may want to buy 100 units at $8, but because suppliers only want to sell 60 units, they decide how much is bought and...
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This document was uploaded on 01/16/2014.

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