Price Ceilings and Price Floors
A ceiling is a legal maximum price and a floor is a legal minimum. In the competitive model, a ceiling below equilibrium creates a shortage and a floor above equilibrium creates a surplus. Effects can include waiting lists, reduced upkeep and unsold stock.
What a learner can do afterwards
- Draw a binding price ceiling and mark the shortage it creates on the diagram
- Name who gains and who loses under rent control, including the people who never get a flat and so never appear in the argument
- Explain why elasticity decides how large the shortage or surplus turns out to be
1 · Read
Use the competitive model with downward-sloping demand and upward-sloping supply, holding other influences fixed. Equilibrium is where quantities demanded and supplied match. Above that price, sellers offer more than buyers want, leaving a surplus. Below it, buyers want more than sellers offer, leaving a shortage. If prices can adjust, these gaps put pressure on price.
A ceiling is a legal maximum price. It binds below equilibrium, creating a shortage. A floor is a legal minimum price. It binds above equilibrium, creating a surplus. For labour in this competitive model, workers supply work and employers demand it. A minimum wage above equilibrium leaves more labour offered than hired. Real labour markets can behave differently. A ceiling above equilibrium leaves the equilibrium price available, so it has no effect in this model.
A binding rent ceiling can lower rent for tenants who obtain flats. Landlords receive less rent and may cut maintenance. Some applicants cannot find a flat at the capped rent. A report interviewing only landlords and current tenants misses those excluded applicants. Count benefits, lost access and changes in upkeep when judging the policy.
Elasticity compares percentage changes in quantity and price. Start with the same equilibrium price and quantity and the same binding cap. With identical demand, more elastic supply over the price cut falls further, widening the shortage. In a separate comparison, if both curves are more elastic over the cut, supply falls further and demand rises further. Compare responses over the whole price change; elasticity at one point alone cannot rank shortages.
In the competitive model, binding ceilings create shortages and binding floors create surpluses. Compare like conditions when using elasticity.
Rewritten readings were written for this dataset.
More to read
When price limits affect a market
A price ceiling sets the highest lawful price; a price floor sets the lowest. In the competitive model, ceilings below equilibrium create shortages, while floors above equilibrium create surpluses. Minimum wages put a floor under labour prices. If employers compete, labour demand falls as wages rise, and labour supply rises, a binding minimum wage means workers offer more labour than employers hire. This prediction does not mean every actual wage rise cuts employment. Check the assumptions and whether the limit rules out equilibrium.
Price ceilings and price floors
A binding rent ceiling can lower rent for tenants who obtain flats, while other applicants cannot find one. Lower rental income can reduce landlords' incentive to maintain housing. These effects are possibilities to investigate, not fixed outcomes for every tenant or landlord. A survey of current tenants alone misses excluded applicants. To compare shortage sizes using elasticity, hold the starting equilibrium price and quantity, the cap and the other curve fixed. More elastic supply over that price cut means a larger drop in quantity supplied. More elastic demand means a larger rise in quantity demanded.
Finding a market's balance
Holding other influences steady, the usual competitive model gives demand a downward slope and supply an upward slope. Their intersection identifies equilibrium: a price and quantity. Higher prices leave more goods offered than wanted, creating a surplus. Lower prices leave buyers wanting more than sellers offer, creating a shortage. Only binding controls block price adjustment. Equilibrium remains possible under a higher ceiling or a lower floor.
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