ECO 1104 Lecture Notes - Lecture 6: Price Ceiling, Price Floor, Economic Equilibrium

• School: University of Ottawa
• Department: Economics
• Course: ECO 1104
• Professor: David Gray

Document Summary

Price floor: minimum wage, agricultural price supports. Price ceiling is a regulated price designed to protect the interests of consumers. The government dictates a maximum price for a commodity. Example: rent control laws: go(cid:448)er(cid:374)(cid:373)e(cid:374)t decides that re(cid:374)ts are(cid:374)"t (cid:862)fair(cid:863) It intervenes in the housing market to provide affordable housing. Price floor the (cid:373)arket ge(cid:374)erates a price (cid:449)hich offe(cid:374)ds our se(cid:374)se of (cid:862)social justice(cid:863) The price is so lo(cid:449) that producers ca(cid:374)"t (cid:373)ake a dece(cid:374)t li(cid:448)i(cid:374)g. It is the consumers on the demand side who are exploiting the producers on the supply side. Government comes to the rescue by imposing a price floor. Creates a situation of excess quantity supplied: price increases, quantity supplied increases, price increases, quantity demanded decreases, big surpluses emerge, placing downward pressure on prices, situation is unsustainable unless the surplus is removed from the market. A price floor is ineffective unless it is above the equilibrium price.