Price ceilings and price floors.
A price floor set below the equilibrium price leads to.
How price controls reallocate surplus.
The equilibrium price commonly called the market price is the price where economic forces such as supply and demand are balanced and in the absence of external.
When a price floor is set above the equilibrium price as in this example it is considered a binding price floor.
As seen in the diagram minimum price is set above the market equilibrium price.
If set below the equilibrium price it would have no effect.
When quantity supplied exceeds quantity demanded a surplus exists.
The result is a quantity supplied in excess of the quantity demanded qd.
Price floors are only an issue when they are set above the equilibrium price since they have no effect if they are set below market clearing price.
When a price ceiling is set a shortage occurs.
A price floor is a government set price above equilibrium price.
In order for a price ceiling to be effective it must be set below the natural market equilibrium.
When they are set above the market price then there is a possibility that there will be an excess supply or a surplus.
Price floors prevent a price from falling below a certain level.
In the price floor graph below the government establishes the price floor at price pmin which is above the market equilibrium.
B quantity of zero units.
Price ceiling a price ceiling is a government set price below market equilibrium price.
The result is that the quantity supplied qs far exceeds the quantity demanded qd which leads to a surplus of the product in the market.
Do these create shortages or surpluses.
Minimum wage and price floors.
A price floor must be higher than the equilibrium price in order to be effective.
The effect of government interventions on surplus.
Price and quantity controls.
Taxation and dead weight loss.
A price ceiling occurs when the government puts a legal limit on how high the price of a product can be.
Example breaking down tax incidence.
It is an implicit tax on producers and an implicit subsidy to consumers.
Price floors cause surpluses.
Price floors and price ceilings often lead to unintended consequences.
Once introduced at pmin the price floor will cause an excess supply surplus of q3 q1 because quantity demanded is q1 and quantity supplied is q3.
When a price floor is set above the equilibrium price quantity supplied will exceed quantity demanded and excess supply or surpluses will result.
