Question

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

Answer 1

Answer :

Price Ceiling : A price ceiling is the maximum amount a seller is allowed to charge for a product or service.Example price ceiling is rent control, which limits the increases in rent.

Price Floor :  A Price Floor is defined as a government intervention to raise market prices if the price is too low. Price Floor is the minimum amount a seller charges for a product or service. Example  of a price floor is the minimum wage for workers set by government.

Price ceiling leads to shortage because Price ceilings are enacted to keep prices low for those who demand the product and as price remains low, consumption increases which results in shortage.

Price floor leads to surplus because when there is price floor quantity supplied will exceed quantity demanded, and excess supply or surpluses will occur.