Microeconomics Chapter Six: Supply, Demand, Government Policies

Price Ceiling

The legal maximum on the price at which a good can be sold.

Price Floor

The legal minimum on the price at which a good can be sold.

Non-Binding

A government imposes a price limit that has no immediate effect on the market because free market equilibrium satisfies that rule. The government prefers this over binding rule as it helps to control the equilibrium price from rising past it’s limits.

Binding

A government regulation, price control, or economic constraint that restricts market behavior and forces a change from the free market equilibrium.

What happens when the price ceiling is binding?

The government imposes a binding price ceiling, results in a shortage arising, and sellers having to ration scarce goods among potential buyers.

What is a real life example that price ceiling bindings are seen in?

Gasoline and rent control.

What happens when the price floor is binding?

A binding floor, causes quantity supplied to exceed quantity demanded which is a surplus. To eliminate this surplus, sellers must appeal to the biases of buyers/sell to their buyers of family, friends, or members of the same race.

What is a real life example of when the price floor is binding?

Minimum Wage. As it controls that when quantity supplied of labor exceeds quantity demanded then unemployment is seen.

Tax Incidence

The manner at which a burden of taxes is shared among participants in a market.