Price Floor - Sets a minimum amount to be paid for a good or service. It stops prices from dropping to equilibrium. It can create a surplus, and happen above equilibrium. In absence of the floor, prices would go down, increasing the quantity demanded and decreasing the quantity supplied until they are equal.
- Ex. : Minimum wage.
Price Ceiling - Sets a maximum price that could be legally charged for good or service. It stops prices from rising to equilibrium. It can create a shortage, and happen below equilibrium. In absence of the ceiling, prices would go rise, reducing the quantity demanded and increasing the quantity supplied until equilibrium is reached.
- Ex. : Rent control.
There seems to be some inconsistencies with your explanation and the explanation on this website. I'll give you a short summary on what it says:
ReplyDeleteThe price floor is set above the equilibrium (the point at which the lines intersect) because it's primary job is to prevent prices from getting too low. If it is set below equilibrium, then the market won't sell below equilibrium and it will be rendered useless. A price floor often causes a surplus while a price ceiling causes an shortage.
I might be interpreting it wrong, but if you could elaborate on this a little more I would highly appreciate it.
Thank you for your input, I have fixed the confusion.
DeleteNancy,
ReplyDelete(Due to my many absences in the month of January, I've noticed many discrepancies)
Please update your notes to reflect the following:
A price floor sets a minimum amount to be paid for a good or service. It stops price from dropping to equilibrium. Price floors create a surplus, and happen above equilibrium.
In the absence of the floor, the price would go down, increasing the quantity demanded and decreasing the quantity supplied until they are equal.
A price ceiling sets a maximum amount to be paid for a good or service. It stops price from rising to equilibrium. Price floors create a shortage, and happen below equilibrium.
Were the ceiling to be removed, the price would rise, reducing quantity demanded and increasing quantity supplied until equilibrium is reached.
I have fixed and update my notes, thank you for your input.
Delete