ECON 201 Lecture Notes - Lecture 12: Price Floor, Economic Equilibrium
Document Summary
A price ceiling is a maximum price that the government imposes on a good: example include rent controls and gas price controls that were enacted in the 1970s. A price floor is a minimum price that the government imposes on a floor: the most obvious example is a minimum wage, there are also agricultural price supports. A price ceiling has no effect unless the market price would be above the ceiling. Likewise, a price floor has no effect unless the market price would be below the floor. We say that the ceiling or floor binds in these circumstances. Nonbinding ceiling is when price ceiling is above the equilibrium price. Binding ceiling where the ceiling is below the market price. When a price ceiling binds, the government forces the equilibrium price to equal the ceiling and not the market price. There will be a shortage since sellers are not willing to meet demand at that low price.
