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The price ceiling is the legally mandated maximum price beyond which the price is not allowed to rise. The price floor is the legally mandated minimum price designed to maintain a price above the equilibrium level.
PRICE CEILING AND FLOORS
In a market economy, the price of a good is determined by the interaction of demand and supply.
It is that point on the graph that is shown where the demand and the supply curve intersect each other. It is the price at which the demand of the consumers is met by the supply from the producers. It is an essential for a stable market.
Price above market equilibrium:
If the price exceeds the equilibrium price, a surplus occurs and there will be competition among the sellers and price will come down to the equilibrium point. This way the equilibrium is tried to maintain in each of the cases.
Price below the market equilibrium:
If the price is below the equilibrium a shortage occurs and there will be a competition among the buyers and the price will rise to the equilibrium level. This is also another way to restore the equilibrium though there are changes that are occurring in the market in the prices.
A price ceiling is the legally mandated maximum price beyond which the price is not allowed to rise. The purpose is to keep the price below the market equilibrium price.
- rent controls
- price controls during wartime
- gas price rationing in the 1970s
Price Ceiling does two things
- It reduces the availability from Qe to Qs and
- It increases the amount requested to QD.
Thus the difference between Qd and Qs represents a shortage in the medical market.
The shortage manifests in terms of
- Longer delays in getting appointment
- Longer waits at the physician’s office
- Reduced access to high-tech surgical and diagnostic equipment and
- Lower quality of care
A price floor is the legally mandated minimum price designed to maintain a price above the equilibrium level. There are a number of examples for this.
- agricultural price supports
- minimum wage laws
Let us take an example of the market for the unskilled labors. Let us see what happens in this case.
- If the Govt. raises the cost of hiring workers by mandating that all firms provide health insurance for their employees, the cost of this new benefit raises the effective wages to Wf
Apart from this, there are two things that the price floor does:
- Reduces quantity demanded
- Increases the quantity supplied
The most important thing of all these is that there has to be an equilibrium that is being maintained. These floors and ceilings are the tools that help to attain that in a proper way.