What Is the Purpose of Setting a Price Floor and Price Ceiling?
The price Ceiling is one of the approaches the Government uses to control prices and set a limit for charging high prices for a product. The purpose of the price ceiling is to prohibit the people who charge high prices to their customers, protecting and preventing them from misconduct. The High Prices Condition may occur during a period of Inflation or when the market type is Monopolistic. The Government may set a suitable and required price on a product at a price below the equilibrium.
So being a part of the economy, when the Government considers such action. It becomes obligatory for every business to use the price ceiling approach. Economic and Market Growth takes place with the help of this measure as the set of prices becomes limited 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 a set of equilibrium prices for 30 homes is $10,000. But once the Government makes a Price ceiling of $7,000 thus they have to charge as per government rules. But at this rate, the shortage occurs as the demand is for 50 houses, but the supply is just for 30 houses. So in the future course of the 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 of how the Price ceiling can have a negative impact on the market. A Price Ceiling can create problems because long-term obligations on prices can create shortages for the future period and impact the economy.
What is a Price Floor?
Price Floors are usually the least/minimum prices the Government determines for some of the products and services. They believe can create a problem in the economy by selling them at the unfair market with excessively low prices. Price Floors occur when the prices set by the Government exceed equilibrium prices. As such, determination does not affect the market even if they set less than the clearing prices of the market.
Generally speaking, Price Floor gives a different perspective to various parties of the economy. The producers benefit greatly from this policy/approach because when the supply curve of the market slopes relatively elastic, they do not get any loss. Hence such kind of approach becomes satisfactory and significant for the producers. The price Floor also affects the consumers because this kind of regulation can create issues for them. Some people/consumers are charged from this approach, whereas others pay higher prices for the same commodities. With many advantages, this approach also has some drawbacks and the most 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 the economic 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 need more time to get ready to make the supply. However, if the price ceiling is above the equilibrium, consumer demand can fall more than the actual supply in the economy.
This graphical representation shows the impact of the price ceiling and the determination of the demand and supply rates. They determine 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 a Surplus in the economy.
What Does It Mean to Be Binding in Economics?
Binding Floor Price gives a chance to the Government to set prices on certain goods that are high. It also creates economic Disequilibrium. Such kind of policy can set a limit to sell the goods at market price or below the price Floor rate. And it can also impact low wages and less growth of some Economic Factors.
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