Price Supports

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Price Supports

• Here are two examples of government intervention
  in a market.

2
Word association game
Ill say a word and I want you to look at the
word I say. You better play because Ill know if
you dont. Left hand Ceiling Right foot
Floor. Very good class! Now, in economics when
we say ceiling and floor we want you to think
differently.
3
Price Ceilings and Price Floors
Price ceilings and price floor are government
price supports that occur mainly because folks
have indicated there is something about the
market price that they do not care for.
Typically this dislike is that the price is too
high or too low. When you walk in a room you
stand with the floor below and the ceiling up.
BUT, when you stand at the market price the floor
has to be above and the ceiling below. Lets see
why.
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price floor
The downward arrow is here to suggest price can
not get below Pf.
P
S1
A price floor is a minimum legal price. The
government enacts one when it is felt the market
price is too low. So an effective legal minimum
must be above the equilibrium price so price can
not get down to the unwanted P1.
Pf
a b c d e
P1

D1
Q
Qs
Q1
Qd
Look up for the floor!
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price floor
With the price floor we see, in comparison to the
normally functioning market 1) higher price
Pf, 2) lower quantity demanded - from Q1 to Qd.
3) Higher quantity supplied - Q1 to Qs. 4)
surplus Qs - Qd. 5) A lower amount traded -
Qd. The amount traded has fallen because sellers
can only sell what buyers buy.
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price floor
One thing we notice with the floor is a surplus
is created. What happens to the goods that are
made and not purchased? Maybe the government will
buy them the government would have to pay (Qs
Qd)times Pf to buy the surplus. Maybe the
government will ask producers not to make them.
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price ceiling
P
A price ceiling is a maximum legal price. The
government enacts one when it is felt the market
price is too high. So an effective legal maximum
must be below the equilibrium price. Price can
then not legally get to the unwanted P1.
S1
P1
Pc
D1
Q
The upward arrow is here to suggest price can not
get above Pc.
Qd
Q1
Qs
Look down for the ceiling
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price ceiling
With the price ceiling we see 1) lower price
Pc, 2) lower quantity supplied - from Q1 to Qs.
3) Higher quantity demanded - Q1 to Qd. 4)
shortage Qd - Qs. 5) A lower amount traded Qs.
The amount traded has fallen because buyers can
only buy what sellers sell.
9
price ceiling
P
This screen is a repo of a previous screen.
Imagine you are sitting at P1, do it! Where do
you look for the ceiling? Down! Why not up? A
ceiling above P1 would cause a surplus and we
know with a surplus the price will fall. It
would fall to P1.
S1
P1
Pc
D1
Q
The upward arrow is here to suggest price can not
get above Pc.
Qd
Q1
Qs
Price ceilings above equilibrium are not
binding Or are not effective!
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Eliminating a price support?
What would happen if enough people got sick up
and feed (you know, feeling ill) with price
supports and had them eliminated? What would
happen in the market? If there was a price floor
then the quantity demanded would rise and the
quantity supplied would fall and supply and
demand would meet at the new lower price. If
there was a price ceiling then the quantity
demanded would fall and the quantity supplied
would rise and supply and demand would meet at
the new higher price.