Price Ceilings & Floors

Price ceilings are usually government policies and limits that intend to save consumers from being charged too high a price. This generally means to limit and control how high a price for a product can go. If price ceilings are not present, the suppliers will set prices extremely high for necessities which then become too expensive to be affordable. Suppliers know that no matter what, the items that are necessary will be bought by customers no matter what; this gives them a chance to charge high prices and get revenue, but price ceilings by governments are what protect the customers in such situations.

However, they should not go unchecked, as changes and shifts are very important based on then currently market realities. An effective price ceiling is usually below the equilibrium point; otherwise it is pointless as customers would pay the price at equilibrium which is higher than the price ceiling. Price Floors: Price floors are the opposite of price ceilings – this is the control that is brought about by either government, or cartels and groups that are formed to sell the product as a coalition with quotas.

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This checks how low a price can go; prices when reduce, should not reduce below this line for a certain product.

In order for price floors to play the role that they are intended to play; that is, the price should not be extremely low or else the demand increases but nobody is interested in the production; the price floor should be above the equilibrium price.

This means that there is a surplus of production and the demand is lesser than that at equilibrium because customers do not want to pay a higher price than that of the equilibrium; but at the same time, more producers are willing to manufacture this particular product. As a Renter:

Usually, the landlords have a habit of overcharging tenants; reason being the difficulty and shortage of houses available in the same range at one point in time. In such cases, the government sets a price ceiling; which means that the tenant can be charged a price that does not go above that particular ceiling. This benefits somebody as a renter to be saved from very high rent expenses. This is normally the case with students, bachelors and people leading single lives and providing for them. In cases of students, there is a charge for living in dorms but that charge is as low as possible (minimum).

As a Student: A student normally does not have a lot of money to spend on rent, tuition fee, daily expenses and transportation etc. This is usually a lot of a student to bear, especially when there is a lack of financial support from family. As a student, it is almost critical to be able ton get books and stationery and photocopies and general every day expenses. As a student, it becomes very difficult to pay for such basic things all the time; these basic things are actually necessities. Therefore, price ceilings are present in cases of necessities to make sure that not a very high price is charged for this.

These ceilings are usually below the equilibrium point or else they become ineffective; because otherwise, if the price ceiling would be above the equilibrium price then this would show that despite the fact that the government has set a maximum price, the market is working at a price below that. Naturally, in this case, the demand is higher than the supply. As an Employee: Labors works in a way where employees are suppliers of labor and the organizations/producers are consumers of it for manufacturing.

Equilibrium prices in this case are always a problem because the employees want a higher pay and the organizations want to pay as low as possible. There are times, mostly, when the producers exploit the employees by not hiring them unless they agree to a lower price – stricken by unemployment, most of these laborers agree to these low prices and work. However, this is unfair on the laborers; because if there is just one employer in a specific region, then they are not left with much choice and have to give in to low prices.

Therefore, the government sets a minimum wage which is above the equilibrium price so that the laborer can have some advantage. Here, again, the supply is greater than the demand, but it is fair to the employees. But then again, the prices and costs depend on the worker’s competencies, skills and the general market conditions at that point in time. Consequences of Price Ceilings: Price ceilings might seem to be favorable for many parties, but it has its own consequences.

Firstly, there is a reduction in quality of the good being provided – even if the product is now being sold at a lower price, but now the producers sell goods of lower quality to cover up for the lost profit margin. Also, this brings in a new phenomenon of black markets; this is where sellers sell at prices lower than the price ceilings illegally. This is illegal, but people who cannot afford higher prices resort to this to fulfill their needs. Black markets ruin the image of a country and disrupts the working of a market and making the statistics of an economy incorrect.