price floor is the bottom dollar for an item, econmics assignment help


To put it very simply, the price floor is the bottom dollar for an item. This keeps the markets stable and the prices somewhat feasible so the markets do not tank due to the lack of demand for a certain product. A Price ceiling is the max price the product can be sold for. The ceilings are in place to keep the prices somewhat under control to help prevent over inflation or bubbles in certain markets.


There are two types of price controls: price ceilings and price floors. The difference between them is whether the government is setting a minimum or maximum price for something. A price ceiling is the legal maximum price for a good or service, while a price floor is the legal minimum price. Although both a price ceiling and a price floor can be imposed, the government usually only selects either a ceiling or a floor for particular goods or services. When prices are established by a free market, then there is a balance between supply and demand. When the government imposes price controls, then there will be either excess supply or excess demand, since the legal price is often very different from the market price. Indeed, the government imposes price controls for the very reason that it is not satisfied with the market price.

A price ceiling creates a shortage when the legal price is below the market equilibrium price, but has no effect on the quantity supplied if the legal price is above the market equilibrium price. A price ceiling that is below the market equilibrium price creates a shortage that causes consumers to compete vigorously for the limited supply. Supply is limited because suppliers are not getting the prices that would allow them to earn a profit. Likewise, since supply is proportional to price, a price floor creates excess supply if the legal price is above the market price. Suppliers are willing to supply more at the price floor than the market wants at that price.

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