Question

• Give an example of a price ceiling and an example of a price floor.

• Which causes a shortage of a good—a price ceiling or a price floor? Explain.

• Explain why economists usually oppose controls on prices.

Answer 1

A) Price ceiling example - suppose in the market price of a drug is P but government fixed a price P1 which below the equilibrium price than it is price ceiling. Because government doesn't want price to rise above P1.

Price floor example - in the crop market when government fix a price P1 which is above the equilibrium price P to support farmers. This is price floor.

B) price ceiling cause shortage. Since, price ceiling is price set below the equilibrium price. At this price demand exceeds the supply creating shortage.

C) Economist oppose control because it create inefficiency in the market. When any type of price control is excercised it leads to dead weight loss due to either excess or surplus. Thus resources are underutilized or overutilized.