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    Price ceiling and floor in a market

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    Demonstrate the effects of a price ceiling and a price floor on a market. As for what happens with pricing is different than equilibrium, a price Floor is Minimum wage where the wage rate is higher than the rate at equilibrium. While a price Ceiling is like rent controls in large cities to keep rents lower so it is more affordable which causes rents to be lower than equilibrium. Minimum wage is one example and New York's Rent Control is another one. Discuss which of these two examples is either a floor; or a ceiling and explain why? Videos may help in the Announcements.

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    Solution Preview

    The concept of a price "floor" or "ceiling" is bound up with the rationality of both producers and consumers.

    This is a good intro: http://staffwww.fullcoll.edu/fchan/Micro/1MKTEQUIL.htm

    and

    http://www.mbs.edu/home/jgans/mecon/value/Popups/pop_up_using_maths_to_find_equilibrium.htm

    Market economics is "rational" because the rationality of producers and consumers moves inevitably towards equilibrium. You need to explain the mechanism:

    1. If a desired good is cheap, more will buy it, forcing the price up until the demand falls off. Where it ends up is its equilibrium.

    2. If a desired good is expensive, people will either not buy or find substitutes. The result is the price will fall, increasing consumption. Again, where the price ends up is its equilibrium.

    3. Of course, the idea is that people want goods they need cheaply. If it is too cheap, they will buy more. If is to expensive, they will buy less. Then the rationality of the producers kicks in, and they shift production so as to meet demand.

    So, let's look at the issues:

    Rent control: ...

    Solution Summary

    Concepts of both a price ceiling and a price floor on a market are carefully expressed and cited for student exploration.

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