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Questions and Answers
What is a price ceiling?
What is a price ceiling?
The highest price that may be charged by law; an effective price ceiling is set by the government below the equilibrium price.
What is the difference between an effective price ceiling and an ineffective price ceiling?
What is the difference between an effective price ceiling and an ineffective price ceiling?
- Ineffective: Set at or above the equilibrium price (correct)
- Effective: Set at or above the equilibrium price
- Ineffective: Set below the equilibrium price
- Effective: Set below the equilibrium price (correct)
What happens to the market when an effective price ceiling is imposed?
What happens to the market when an effective price ceiling is imposed?
Quantity demanded exceeds quantity supplied.
What is a price floor?
What is a price floor?
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What is the difference between an effective and ineffective price floor?
What is the difference between an effective and ineffective price floor?
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What happens to the market when an effective price floor is imposed?
What happens to the market when an effective price floor is imposed?
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Study Notes
Price Ceilings
- A price ceiling is the maximum price that can legally be charged for a good or service.
- An effective price ceiling is established below the market equilibrium price to impact the market.
- When an effective price ceiling is enforced, demand exceeds supply, leading to shortages.
Price Ceilings Classification
- Effective price ceiling: Below the equilibrium price, creating market distortions.
- Ineffective price ceiling: At or above the equilibrium price, having no impact on the market.
Price Floors
- A price floor is the minimum price that must be charged for a good or service by law.
- An effective price floor is set above the market equilibrium price, aiming to support market prices.
- When an effective price floor is imposed, supply outstrips demand, resulting in surpluses.
Price Floors Classification
- Effective price floor: Above the equilibrium price, potentially leading to excess supply.
- Ineffective price floor: At or below the equilibrium price, failing to influence market outcomes.
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