Price Ceiling and Price Floor | Think Econ

Summary

This video explains two key government price controls: price floors and price ceilings. It begins by illustrating a market in equilibrium, where supply meets demand. Price floors, set above the equilibrium price, create surpluses and inefficiencies, such as higher costs and waste. An example is a government-imposed price floor on wheat. Conversely, price ceilings, set below the equilibrium price, create shortages and inefficiencies like black markets. Rent control is an example. The video emphasizes how both controls disrupt market equilibrium and cause deadweight losses. Viewers are encouraged to engage by liking, subscribing, and commenting.

Takeaways

• 📊 Introduction to government price controls, specifically price floors and price ceilings.
• ⚖️ A supply and demand graph shows market equilibrium, where quantity demanded equals quantity supplied at price P*.
• 🏛️ Governments may intervene if they believe the equilibrium price is undesirable, setting prices above or below equilibrium.
• 📉 A price floor is a minimum price set by the government, which is only effective if set above the equilibrium price.
• 🌾 An example of a price floor is wheat farming, where the government ensures farmers receive a minimum payment.
• 📉 Price floors create inefficiencies like excess supply (surplus) and deadweight loss in the market.
• 🏢 A price ceiling is a maximum price the government allows for a product, effective if set below the equilibrium price.
• 🏠 An example of a price ceiling is rent control, aimed at keeping housing more affordable for tenants.
• 🔄 Price ceilings lead to inefficiencies such as excess demand (shortage), wasted resources, and black markets.
• 📉 Both price floors and price ceilings disrupt market equilibrium, leading to conditions like shortages and surpluses.

Q & A

What are the two types of price controls discussed in the video?

The two types of price controls discussed are price floors and price ceilings.

What is a price floor and when is it effective?

A price floor is a legal minimum price that must be charged for a good. It is effective, or 'binding,' when set above the equilibrium price.

Can you provide a real-life example of a price floor?

A real-life example of a price floor is the price floor on wheat, where the government ensures farmers receive a minimum price for wheat.

What is the consequence of imposing a price floor?

Imposing a price floor can lead to market inefficiencies, including deadweight loss, excess supply (surplus), and wasted resources.

What is a price ceiling and when is it considered 'binding'?

A price ceiling is the maximum price that can be charged for a good. It is 'binding' when set below the equilibrium price.

What is an example of a price ceiling in real life?

An example of a price ceiling is rent control, where the government limits how much landlords can charge for rent.

What market inefficiencies are caused by price ceilings?

Price ceilings lead to excess demand (shortage), wasted resources, black markets, and inefficient allocation to buyers.

How do price floors and price ceilings affect market equilibrium?

Both price floors and price ceilings knock the market out of equilibrium, causing conditions similar to surpluses (for price floors) or shortages (for price ceilings).

What is deadweight loss in the context of price controls?

Deadweight loss refers to the lost surplus for both producers and consumers when the market is not in equilibrium due to price controls.

Why might a government impose price controls despite the inefficiencies they cause?

Governments may impose price controls to achieve more equitable outcomes for certain groups in the market, such as farmers with price floors or renters with price ceilings.