Question

Define price ceiling and price floor and give an example of each. Which leads to a...

Define price ceiling and price floor and give an example of each. Which leads to a shortage? Which leads to a surplus? Why?

400 Words min.

Homework Answers

Answer #1
  • Price ceiling and price floor are the two government limits set to prevent firms from charging too high or too low prices.
  • Price ceiling is usually set below the equilibrium price level to prevent firms from charging very high prices and hence to protect the consumer's.
  • While price floor is usually set above the equilibrium price level to prevent firms from charging very low prices.
  • While price ceilings create shortages within the market, price floors create surplus within the market economy.
  • This is because, when prices are kept low due to a price ceiling, the firms produce less, therefore demand exceeds supply thereby creating shortages.
  • When prices are kept high due to a price floor, firms produce too much while the demand falls as price rises due to a price floor. Therefore supply exceeds demand thereby creating a market surplus.
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