Econ 1100 - Chapter 6 - Policy of Supply and Demand

Price Ceiling

A legal maximum on price at which a good can be sold (ice cream eaters)

Price Floor

A legal minimum on price at which a good can be sold (ice cream makers)

Not Binding Price Ceiling

If the ceiling is set above the market price (like $4 when the market price is $3), it doesn’t matter.

The market price stays at $3, and nothing changes.

Binding Price Ceiling

If the ceiling is set below the market price (like $2 when the market price is $3), it does matter.

The lower price makes more people want ice cream, but sellers supply less. This causes a shortage because demand is greater than supply.

Not Binding Price Floor

• Not binding means the floor is set below the market price.

  • Example: Market price = $5, floor = $4.

• Since the market price is already above the floor, the rule doesn’t affect the market.

• Outcome: Price and quantity stay at the free-market equilibrium — no shortage or surplus.

Quick way to remember: “Not binding → doesn’t change anything.”

Binding Price Floor

• A binding price floor is set above the market price.

  • Example: Market price = $5, floor = $6.

• Sellers want to supply more at the higher price, but buyers want less.

• Result: Surplus — more goods are available than people want to buy.

Quick way to remember: “Binding → price is forced up → too much supply → surplus.”

earned income tax credit

a government program that supplements the incomes of low-wage workers

Tax Incidence

The study of how the burden of a tax is distributed among the various people in the economy.