MicroeconomicsLesson 3 of 4 in the course Demand and Supply

Binding Price Ceilings and Floors: Shortages, Surpluses, and Tradeoffs

5 flashcards · 5 quiz questions · 5 match pairs · 4 fill-in sentences · English

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Summary

This lesson explains how governments use price ceilings to limit the prices buyers must pay, and how these limits affect markets. Rent control provides a useful example of why a policy intended to make a good more affordable can also create unintended consequences.

Price controls are laws that regulate the prices buyers pay or sellers receive. A price ceiling is the legal maximum price that can be charged for a good or service. Governments often impose ceilings on goods considered necessities, with the goal of keeping them affordable.

All flashcards

What is a price control?
A law that regulates the price buyers pay or the price sellers receive.
When is a price ceiling binding?
When it is set below the equilibrium price and constrains the market price.
Name two possible costs of rent control.
Some renters may be unable to find housing, and landlords may reduce maintenance or convert rental units to other uses.
What happens when a price floor is binding?
When set above equilibrium, it can create a surplus because quantity supplied exceeds quantity demanded.
How can a government sustain an agricultural price above equilibrium?
It can purchase surplus output, with the cost borne by taxpayers.

Quiz questions

  1. What is a price ceiling?Answer: A legal maximum price for a good or service.
  2. When can a price ceiling create a shortage?Answer: When it is below equilibrium, so quantity demanded exceeds quantity supplied.
  3. At a controlled rent, renters demand 19,000 units and landlords supply 15,000. How large is the shortage?Answer: 4,000 rental units.
  4. What is a price floor?Answer: A legal minimum price that can be paid for a good or service.
  5. Why might a government buy surplus agricultural output when supporting a price above equilibrium?Answer: Purchases add demand and help sustain the supported price.

Based on Principles of Economics 3e by Steven A. Greenlaw, David Shapiro, Daniel MacDonald (OpenStax), licensed CC BY 4.0. Adapted into a summary, flashcards and quizzes.

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