Question

Please answer all.

51. How do markets respond to price ceilings and price floors? Do attempts to repeal the laws of supply and demand meet their objectives?

52. How does the United States differ from the European Union in how it balances the competing claims of equality and efficiency?

Answer 1

Answre to q. 52:

Price ceiling is the upper limit on the price of goods and services imposed by the government to protect the interest of consumers.It is generally imposed on essential items. For example, in India, prices of essential drugs and prices of food grains, sugar, kerosene etc are fixed by the government, below market determined price. The price ceiling will always be less than equilibrium price.If the market price is too high for the common man the government fixes the ceiling price to protect them. Then the price ceiling is less than the market price. Price ceiling leads to excess demand.

Price ceiling has some adverse effects. Some consumers are willing to pay higher price due to excess demand This may result in the creation of black market. Though the intention of the government is to help consumers, it would lead to creation of shortage of such essential items. So to ensure availability to everyone, essential items are rationed to consumers.

Floor price or support price is the minimum price of goods and services imposed by government to protect the interest of producers. When the price determined by the forces of demand, supply is very low. The producers suffer much loss.  Then the government intervenes in the market and declares price floor. The price floor declared by the government thus protects the interests of the farmers. The surplus commodity due to government's floor price declaration is collected by the government.The product thus stocked by the government is sold when market price rises.If this surplus commodity is not collected by the government market price will go down.

Let us compare

1. Price ceiling : Upper price limit imposed by the government    

Price floor: lower price limit imposed by the government

2. Price ceiling: it will be always be less than equilibrium price

Price floor: more than equilibrium price

3. creation of excess demand

Price floor: creation of excess supply