Question

Provide an example of a price ceiling and a price floor and what are the economic implications of each. How do they impact the market?

Answer 1

Price ceiling:  At price ceiling, demand of goods equals Q1 while supply of goods equals Q2 resulting in more demand than supply. It creates shortage (Q1 - Q2) of goods in the market inducing consumers to pay more for the product which puts pressure on prices to rise and reach to equilibrium. Example of it is, rent, insurance price etc.

Supply ---- Price ceiling - + - to Demand PH 9 Puantity Shortage

Price floor: At price floor, demand of goods equals Q2 while supply of goods equals Q1 resulting in less demand than supply. It creates surplus (Q1 - Q2) of goods in the market inducing producers to reduce price of the product to reduce inventories which puts downward pressure on prices and reach to equilibrium. The classic example of price floor is Minimum wage of labor.

e Date. g Supply t Price floor 1 - - - - A- to ar a sentity pt Surplus

Supply ---- Price ceiling - + - to Demand PH 9 Puantity Shortage

e Date. g Supply t Price floor 1 - - - - A- to ar a sentity pt Surplus