Price Floors and Ceilings

With supply and demand, there are price floors and price ceilings.

Key facts to remembers with price floors and ceilings:

  1. A price floor/ceiling can be above or below the equilibrium.
    1. It’s super easy to think that a floor can only be below, and a ceiling can only be above – but it can go both ways!
  2. When thinking of a price floor or ceiling, think of an actual room.
    1. Just like a real room, prices with a price ceiling can only go below the price ceiling (just like how everything in the room is below the ceiling).
      1. A price ceiling is a maximum, like rent-control
    2. Likewise, prices with a price floor can only go above the price ceiling (just like how everything in a room is above the floor).
      1. Price floors are a minimum, like the minimum wage
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Since they have to charge the price of the floor or above, they will charge the price of the floor and the quantity supplied will be greater than the quantity demanded, resulting in a surplus.
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Since they can charge any price above the floor, and the floor is below the equilibrium, the market will just charge the equilibrium price and we will remain at equilibrium.
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Since they can only charge prices at or below the ceiling, and this ceiling is below the equilibrium, they will charge the price of the ceiling and the quantity demanded will be greater than the quantity supplied, resulting in a shortage.
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Since they can charge prices at or below the ceiling, and the equilibrium is below the maximum price, they will charge the equilibrium and nothing will change.

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