Price ceilings and price floors
A price ceiling below the equilibrium price causes a shortage, a price floor above it a surplus. Only as much is traded as the short side of the market wants.
Formulas and rules
- A ceiling only binds below p* → shortage
- A floor only binds above p* → surplus
- Shortage or surplus = |Q_d − Q_s| at the fixed price
- Quantity traded = min(Q_d, Q_s)
Your turn
Three problems on this topic. Type numbers like 12.5 or 1,250 and elasticities with their sign.
Task
In a market: demand Q_d = 377 − 5p, supply Q_s = 107 + 4p (p in €). The government sets a price floor of €36.00. Work out the quantity demanded and supplied at this price, the surplus and the quantity actually traded.
Quantity demanded
Quantity supplied
Surplus
Quantity traded
Numbers like 12.5 or 1,250; elasticities with their sign (−0.75); percentages as a number (12.5). Round to 2 decimal places.
Worked example
In a market: demand Q_d = 186 − p, supply Q_s = 24 + 5p (p in €). The government sets a price floor of €32.00. Work out the quantity demanded and supplied at this price, the surplus and the quantity actually traded.
Worked solution
- 1.Equilibrium without intervention: p* = 27 → the price floor is above it and binding
- 2.Q_d(32) = 186 − 32 = 154
- 3.Q_s(32) = 24 + 5 × 32 = 184
- 4.Surplus = |154 − 184| = 30; the short side of the market decides what is traded: 154
Typical mistake: Assuming the quantity demanded is traded. The smaller of the two quantities (the short side of the market) is what is traded.
Common questions
Why does a ceiling above the equilibrium price have no effect?
The market settles at the lower equilibrium price anyway, so the limit is never reached. A ceiling only binds below p*.
Real-world examples?
Rent control (ceiling), minimum wage (a floor on the price of labour), guaranteed farm prices.