ECO 304L Lecture Notes - Lecture 6: Price Ceiling, Price Floor, Economic Equilibrium
1. The language of price controls
Suppose that, in a competitive market without government regulations, the
equilibrium price of milk is $2.50 per gallon.
Complete the following table by indicating whether each of the statements is
an example of a price ceiling or a price floor and whether it is binding or
nonbinding.
A price ceiling is a legal maximum on the price at which a good can be
sold. Therefore, prohibiting grocery stores from selling milk for more than a
particular price is an example of a price ceiling. A binding price ceiling is a
price ceiling that is set below the equilibrium price. Because the equilibrium
price is $2.50 per gallon for milk, a legal maximum price of $2.30 per gallon
is a binding price ceiling. A binding price ceiling will ultimately cause a
shortage, while a non-binding price ceiling has no effect on the equilibrium
price and quantity.
A price floor is a legal minimum on the price at which a good can be sold.
Therefore, prohibiting grocery stores from selling milk for less than a
particular price is an example of a price floor. A binding price floor is a
price floor that is set above the equilibrium price. Because the equilibrium
price is $2.50 per gallon, a legal minimum price of $3.00 per gallon is a
binding price floor. A binding price floor will ultimately cause a surplus, while
a non-binding price floor has no effect on the equilibrium price and quantity.
In the labor market, minimum wage laws are an example of a price floor
while a cap on wages is an example of a price ceiling. Moreover, the impact
of the minimum wage laws depends on the skill and experience of the
worker. In this case, new regulations restrict grocery stores from increasing
wages and, thus, attracting more workers. This binding price ceiling causes a
shortage of workers in this labor market.
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Document Summary
Suppose that, in a competitive market without government regulations, the equilibrium price of milk is . 50 per gallon. Complete the following table by indicating whether each of the statements is an example of a price ceiling or a price floor and whether it is binding or nonbinding. A price ceiling is a legal maximum on the price at which a good can be sold. Therefore, prohibiting grocery stores from selling milk for more than a particular price is an example of a price ceiling. A binding price ceiling is a price ceiling that is set below the equilibrium price. Because the equilibrium price is . 50 per gallon for milk, a legal maximum price of . 30 per gallon is a binding price ceiling. A binding price ceiling will ultimately cause a shortage, while a non-binding price ceiling has no effect on the equilibrium price and quantity.
