EC211 · LESSON 03 / 08

3. Price ceilings and floors

A mandated lower price helps those who buy, but will there be enough units for everyone?

Understand

What is this lesson explaining?

A price ceiling is the highest allowed price and binds below the original equilibrium. A price floor is the lowest allowed price and binds above the original equilibrium.

A binding ceiling creates Qd greater than Qs, requiring allocation by another mechanism such as queues or lotteries. A binding floor creates Qs greater than Qd, so desired sales differ from actual sales.

KEY MODEL

Shortage = Qd − Qs

Surplus = Qs − Qd

CeilingMaximum legal priceFloorMinimum legal priceBindingA constraint that changes the market outcome

See it on a graph

The graph is right here

Read the axes and original point first. Then change one value at a time and watch the curve or point move.

A price ceiling below equilibriumQuantity demanded exceeds quantity supplied

Quick check

NO TYPING

In this market a floor of 25 is imposed with no government purchases. What is Qs − Qd?

Takeaway

Remember these two ideas

✓

Initial equilibrium is P = 20, Q = 60. A ceiling of 15 gives Qd = 70 and Qs = 50: shortage 20 and at most 50 transactions.

Common mix-upA ceiling is not always the price charged, and a shortage does not mean demand shifted.

Assumptions and sources

Use Qd = 100 − 2P and Qs = 20 + 2P, with no black market, government purchases, or forced trades.

Pindyck & Rubinfeld, Microeconomics, 9th Global Edition, ch. 2, 9, pp. 47, 338 (PDF 49, 340); original examples and questions.