AP Microeconomics Chapter 6 Price Ceilings and Floors

Price ceiling

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

What does price ceilings result in?

Shortages

Binding price ceiling

Set below equilibrium

Non-binding price ceiling

Set above the equilibrium

What results from shortages?

Long lines, favoritism, black markets, rations

Price floor

A legal minimum on a price at which a good can be sold

Binding price floor

Set above equilibrium

Non-binding price floor

Set below equilibrium

What results from price floors?

Surpluses

What results from surpluses?

Government buys surplus, pays farmers to not grow, or trashes goods

What are the issues with price floors?

Inefficient, hurts poor, Attracts food imports so we have to tariff

What are the zones for each group?

Group 1: 0 to quantity demanded

Group 2: quantity demanded to equilibrium

Group 3: equilibrium to quantity supplied

How do price floors affect group one?

Benefits by making more money

How do price floors affect group two?

Hurt. Lost job.

How do price floors affect group three?

Hurt. Unemployed and can’t find job.

What are the pros of minimum wage?

Increased spending in the economy, people get paid more, incentive to work, prevent prevents exploitation of the vulnerable

What are the cons of minimum wage?

Increased unemployment and jobs replaced by technology

What’s the main takeaway of price controls?

When the government gets involved with setting price, the market becomes distorted.