What is the purpose of setting a price floor and price ceiling?
Price Ceiling is one of the approaches used by the government and the purpose of which is to control the prices and to set a limit for charging high prices for a product. Basically, the purpose of the price ceiling is to make prohibition for the people who charge high prices from their customers and this, protect and prevent them from any misconduct. The High Prices Condition may take place during the period of Inflation or when the market type is Monopolistic. The government may set a suitable and required the price on a product at a price which is below the equilibrium. So being a part of the economy, when such action is considered by the government it becomes obligatory for every business to use price ceiling approach. Economic and Market Growth takes place with the help of this measure as the set of price becomes limit for everyone and that price binds the marketplace for not charging High rates. To understand the concept of Price Ceiling. Let us take a suitable example for this approach:
Let us take the House Rent Market, the price determined as set of equilibrium price for 30 homes is $10,000. But once the Government makes Price ceiling of $7,000 thus they have to charge as per government rules. But at this rate the shortage occurs as demand is of 50 houses but the supply is just for 30 houses. So in future course of period extra 30 homes will be given on rent and which will ultimately cause higher rent and black market practices in the economy.
Why does a price ceiling cause a shortage?
Hence from the above example, you can get an idea that how Price ceiling can give negative impact to the market. A Price Ceiling can create problems because long term obligation on prices can create shortages for the future period and can impact the economy as a whole.
What is a price floor?
Price Floors are usually the least/minimum prices which are determined by the government for some of the products and services which they believe can create a problem in the economy by selling them at the unfair market with excessive low prices. Price Floors takes place when the prices set by the government exceed equilibrium prices as such determination do not give any effect market even if they set less than clearing prices of the market.
Generally speaking, Price Floor gives a different perspective to various parties of the economy. The producers get much benefit from this policy/approach because when the supply curve of the market slopes relatively elastic in such case they do not get any loss. Hence such kind of approach becomes satisfactory and significant for the producers. Price Floor also give effect to the consumers because this kind of regulation can create issues for them as some of the people/consumers are charged out of this approach whereas others have to pay higher prices for same commodities. With having many advantages this approach also has some of the drawbacks and the common among all is its inefficiency and high-cost charges which are levied on the government.
Price Ceiling Graph: The graph gives representation, where the impact of the price ceiling on the demand and supply is shown and however the economy conditions are evaluated.
The above figure shows that the shortage occurs when the price ceiling is levied on the suppliers. Also, the demand by the consumers rises, however, the suppliers may not get ready to make the supply. However, if the price ceiling is above the equilibrium in such case consumer’s demand can fall than the actual supply in the economy. This graphical representation shows the impact of price ceiling and determination over the demand and supply rates. Determining the Binding Price Floor cause Disequilibrium in the economy because it does not consider the people who like to buy commodities at lower prices than the market. Such kind of case creates Surplus in the economy.
What does it mean to be binding in economics?
Binding Floor Price gives chance to the government to set prices on certain goods that are high and it also creates economic disequilibrium. Such kind of policy can set a limit to sell the goods at market price or below the price of Floor rate and it can also give impact on low wages and less growth of some Economic Factors
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