PRICE CEILING AND FLOORING

BY - ADITI AGARWAL
PURVI KANAVIA
AAKANSHA MEHTA
DHITI SAKLANI
SANJANA VANGANI
 PRICE CONTROL

When government laws regulate prices instead of letting market forces determine prices, it is known as
price control.

Price controls are government mandated legal minimum or maximum prices set for specified
goods,usually implemented as a means of direct economic intervention to manage the affordability of
certain goods.

Price controls that set maximum prices are price ceilings while price controls that set minimum prices are
price floors.
 PRICE CEILING

Price ceilings prevent a price from rising above a certain level.

When a price ceiling is set below the equilibrium price, quantity demanded will exceed
quantity supplied, and excess demand or shortages will result.

Government imposes a price ceiling to control the maximum prices that can be charged
by suppliers for the commodity. This is done to make commodities affordable to the
general public.

However, prolonged application of a price ceiling can lead to black marketing and unrest
in the supply side.
Pc denotes price ceiling. Pe denotes the

equilibrium price.

Let's consider the house-rent market. Here in the given

graph, a price of Pe has been determined as the
equilibrium price with the quantity at Qe homes. Now,
the government determines a price ceiling of Pc. At this
rate there is a shortage (demand for Qd houses, but
supply is for only Qs houses). In the long run, the extra
people will try to get a house on rent, which will
eventually give rise to black market and higher rents.
 PRICE FLOORING

Price floors prevent a price from falling below a certain level.

Price floor is a situation when the price charged is more than or less than the
equilibrium price determined by market forces of demand and supply.

When a price floor is set above the equilibrium price, quantity supplied will exceed
quantity demanded, and excess supply or surpluses will result.

Price floor has been found to be of great importance in the labour-wage market.
 Pf denotes price flooring. Pe denotes
equilibrium price.

Equilibrium wage rate is Pe. The price floor is

determined at Pf, which is good for workers, who will
earn more than before. But the flip side is that while at
equilibrium there were Qe workers, after the price floor
there are only Qd workers. Thus workers have been laid
off. At a wage of Pf we see a gap of workers (Qs workers
are willing to work but only Qd workers get work), thus
giving rise to a surplus of workers unemployed.