Question

1. in no more than five(5) lines of typed text below this question, describe where a PRICE CEILING might lie graphically in relation to an equillibrium price AND also describe the market impact or effects of that ceiling.

2. in no more than five(5) lines of typed text below this question, describe where a PRICE FLOOR might lie graphically in relation to an equilibrium price AND also describe the market impact or effects of that price floor.

Answer 1

1. A price ceiling is the maximum price beyond which price is not allowed to go up. Price ceiling can be above the equilibrium price or below the equilibrium price. When a price ceiling is above the equilibrium price, the price ceiling does not impact the market price or quantity. This type of price ceiling is called non-binding price ceiling. In case the price ceiling is below the equilibrium price, it becomes binding and it creates a shortage in the market as demand becomes more than supply.

2. A price floor is a minimum price beyond which price is not allowed to go down. Price floor can be above the equilibrium price or below the equilibrium price. When a price floor is above the equilibrium price, the price floor becomes binding and it creates a surplus as supply becomes more than demand. In case the price ceiling is below the equilibrium price, it does not impact the market. This type of floor is called non-bonding.