ECONOMICS
SUPPLY
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Both involve the government’s setting of a maximum price.
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Both represent input changes that affect demand.
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Both bring about disequilibrium in the market.
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Both are examples of government price supports.
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Detailed explanation-1: -Neither price ceilings nor price floors cause demand or supply to change. They simply set a price that limits what can be legally charged in the market. Remember, changes in price do not cause demand or supply to change.
Detailed explanation-2: -It affects the market equilibrium if it is set below market equilibrium because it decreases the quantity supplied at the ceiling price and increases the quantity demanded at a price below the equilibrium price. This leads to product shortage; the market is at disequilibrium.
Detailed explanation-3: -The price ceiling is the maximum price, or high point set by the government for a product. Similarly, the price floor is a set price that the product cannot go lower than. Both of these are considered a type of price control.
Detailed explanation-4: -A binding price floor leads to a surplus while a binding price ceiling leads to a shortage. In both cases though, the actual quantity traded decreases since there is a mismatch between the quantity supplied and quantity demanded.
Detailed explanation-5: -In the absence of externalities, both the price floor and price ceiling cause deadweight loss, since they change the market quantity from what would occur in equilibrium.