Chapter 6
Price Ceilings & Price
Floors
Principles of Economics
2nd edition
by Fred M Gottheil
PowerPoint Slides prepared by Ken
Long
7/28/2017
©1999 South-Western College Publishing
1
Note, we only cover
pages 126 to 133 in this
chapter, just the material
on price ceilings and
floors
2
What is a Price Ceiling?
A maximum price set by
government below the
market generated
equilibrium price
©1999 South-Western College Publishing
3
A Price Ceiling
S
P
Shortage
QS
QD
D
44
Why a Price Ceiling?
When a price has been
rising rapidly, often due
to limited supply
©1999 South-Western College Publishing
5
What are the economic
affects of a price ceiling?
The ceiling creates a
shortage
6
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
7
What are some examples
of Price Ceilings?
World War II
Rent control in some cities
Gas in the late 1970’s
©1999 South-Western College Publishing
8
What is a Price Floor?
A minimum price set by
government above the
market equilibrium price
©1999 South-Western College Publishing
9
A Price Floor
P
Surplus
S
D
QD
QS
10
10
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
11
What could cause a
Low Market Price?
An improvement in
technology pushing the
supply curve rightward,
reducing price
©1999 South-Western College Publishing
12
Right Shift in Supply
S1
P1
P2
S2
D
Q1
Q2
©1999 South-Western College Publishing
113
3
What are the economic
effects of a price floor?
The floor creates a surplus
14
What is one problem
with Price Floors?
What to do with the surplus
©1999 South-Western College Publishing
15
Examples of Price
Floors?
American agriculture
The minimum wage law
©1999 South-Western College Publishing
16
Agriculture web sites
http://www.nal.usda.gov/bic
http://www.nal.usda.gov/ttic
http://www.fb.com
http://www.ProgressiveFarmer
.com
©1999 South-Western College Publishing
17
• What is a Price Ceiling?
• What is a Price Floor?
18