Price Ceilings & Price FloorsMr. Marinello * Chippewa Valley * Fall 2012

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.

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Binding

Shortage

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 non-binding, and has no effect.

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D1

When the price floor is set ABOVE the equilibrium it has a

binding effect.

i. 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.

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D1

Surplus

Binding

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).