Price ceiling and price floor - Economics Video Lecture | SSC CGL Tier 2 - Study Material, Online Tests, Previous Year

most of the time equilibrium is a good
thing after all it is nothing more than
a point of agreement between producers
and suppliers however sometimes it is
for the greater good to impose limits on
prices this is most often done to
protect the particularly vulnerable in
society but limits have also been used
by a surprising number of firms these
limits come in the form of price
ceilings and price floors as you might
expect price ceilings act to limit
prices from rising to high whereas price
floors act to limit prices from falling
to low maybe you're a friend lives in a
place with incredibly high rent like
Manhattan San Francisco or gasp London
needless to say not everyone can afford
to live in these areas because the rent
is simply too high as a result some
people campaign for a price ceiling on
rent this would prohibit landlords from
charging more than a certain amount of
money for an apartment of a given size
now this does some interesting things to
the supply and demand graph if imposed
in a place like Panama or Vietnam
locations known for their low cost of
living chances are that the ceiling
would be non-binding because the
equilibrium is below the ceiling it
really has no effect this is why we call
it non-binding however this does nothing
for prices if the equilibrium point is
too high in those cases we have binding
price ceilings like this one there is a
lot of information to absorb on this
graph so we'll take it one step at a
time
oh and don't get worried about the fact
that the ceiling is suddenly beneath all
the action that is exactly where it
belongs first of all notice that the
market price is lower on the graph than
the free market equilibrium this is the
ceiling having an effect on prices also
look at the surpluses notice that the
consumer surplus is much larger than the
producer surplus this is because
ceilings are largely designed to benefit
consumers this means that the consumers
are
a much better deal than the producers
are also for now we're going to ignore
the deadweight loss but we'll come back
to it later in this lesson just remember
that it's there however the most
important thing on this graph is that
chunk of excess demand this is because
there are suddenly many more people
wanting to rent houses and many fewer
landlords wanting to rent them because
of this there are often large waiting
lists in areas with housing ceilings
just as some places have rent ceilings
to help the poor many more have wage
floors to help them however you probably
never heard the term wage floor but I
guarantee you've heard the phrase
minimum wage that said a minimum wage is
nothing more than a floor on the price
of labor in this instance it's important
to remember that the workers are the
producers whereas firms are consumers
after all workers are producing the work
and the firm's are consuming it wages
are nothing more than a price of work
like ceilings price floors can be
ineffective as this image shows after
all in many places it's hard to find
people to work for less than minimum
wage even if a company tried however in
many places minimum wage laws do create
an effective price floor again don't be
confused by the fact that the floor is
suddenly above the equilibrium point
now this graph doesn't have as much
going on as the previous one so let's
see if you remember where everything is
the most important aspect is already
labeled as surplus and this is the fact
that by paying a wage above market
equilibrium suddenly more people are
going to want to work than before but
that's enough help from me where are the
surpluses if you guess that the consumer
surplus is between the price axis the
green dotted line and the red demand
line you would be correct not that it is
much smaller than the producer surplus
which is between the green dotted line
the price axis the red dotted line and
the blue supply curve again
producers in this case people who
provide work benefit greatly from price
floors but what about that other term
deadweight loss I know I told you to
ignore it but do you at least remember
where to find it
if you said it's the triangle between
the red dotted line the blue supply line
and the red demand curve
you'd be right and that's what we're
going to talk about next
yes price floors and price ceilings do
have a role to play in the market
however that doesn't mean that they
aren't efficient in fact we can graph
and measure the inefficiency that they
create deadweight loss is a measure of
how much economic efficiency in terms of
goods produced and price paid for them
is lost through price ceilings and price
floors that's right this economic
produce is simply lost to the economy
needless to say sometimes this is
necessary however government's recognize
that to limit surpluses and shortages it
is sometimes necessary to intervene even
further in the example about rent
ceilings some jurisdictions make
payments directly to landlords to offset
the difference between the ceiling price
and the market equilibrium price this
costs the city or state money but make
sure that landlords want to provide
enough housing for everyone
similarly governments especially larger
ones like
the idea of price
Lauzon foodstuffs however that means
that suddenly farmers like to produce a
lot more of it rather than have it flood
the market and spoil their the
government's buy up much of this produce
using it especially for foreign aid in
this lesson we looked at the role of
price floors and ceilings on market
equilibrium
we saw how price ceilings act to limit
prices but often caused a shortage due
to the market not being at equilibrium
likewise we saw how price floors act to
ensure a minimum price but often caused
a surplus due to more producers wanting
to make more Goods as a result
deadweight loss exists unless the
government steps in with a further set
of interventions to soothe the market