1

Chapter 6Chapter 6Chapter 6Chapter 6

Price Ceilings & Price Price Ceilings & Price FloorsFloors

04/10/23

©©1999 South-Western College Publishing

Principles of Economics2nd editionby Fred M Gottheil

PowerPoint Slides prepared by Ken Long

2

Note, we only cover pages 126 to 133 in this chapter, just the material

on price ceilings and floors

Note, we only cover pages 126 to 133 in this chapter, just the material

on price ceilings and floors

3

What is a Price Ceiling?What is a Price Ceiling?A maximum price set by

government below the market generated equilibrium price

©©1999 South-Western College Publishing

4

D

S

P Shortage

A Price CeilingA Price Ceiling

44QDQS

5

Why a Price Ceiling?Why a Price Ceiling?

When a price has been rising rapidly, often due to limited supply

©©1999 South-Western College Publishing

6

What are the economic affects of a price ceiling?What are the economic

affects of a price ceiling?

The ceiling creates a shortage

7

With a Price Ceiling what

determines who gets the product?

With a Price Ceiling what

determines who gets the product?

Queuing or some other form of rationing, such as coupons

©©1999 South-Western College Publishing

8

What are some examples of Price Ceilings?

What are some examples of Price Ceilings?

World War IIRent control in some citiesGas in the late 1970’s

©©1999 South-Western College Publishing

9

What is a Price Floor?What is a Price Floor?A minimum price set by

government above the market equilibrium price

©©1999 South-Western College Publishing

10

D

SP Surplus

A Price FloorA Price Floor

1010QD QS

11

What could justify a Price Floor?

What could justify a Price Floor?

To help suppliers of a specific good to get a higher price than otherwise would be the case

©©1999 South-Western College Publishing

12

What could cause aLow Market Price?What could cause aLow Market Price?

An improvement in technology pushing the supply curve rightward, reducing price

©©1999 South-Western College Publishing

13

S1

S2P1

Right Shift in SupplyRight Shift in Supply

P2

Q2Q1D

1133

©©1999 South-Western College Publishing

14

What are the economic effects of a price floor?What are the economic effects of a price floor?

The floor creates a surplus

15

What is one problem with Price Floors?

What is one problem with Price Floors?

What to do with the surplus

©©1999 South-Western College Publishing

16

Examples of Price Floors?

Examples of Price Floors?

American agricultureThe minimum wage law

©©1999 South-Western College Publishing

17

Agriculture web sitesAgriculture web sites

http://www.nal.usda.gov/bichttp://www.nal.usda.gov/ttichttp://www.fb.comhttp://www.ProgressiveFarmer.com

©©1999 South-Western College Publishing

18

• What is a Price Ceiling?• What is a Price Floor?