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.

Outlines

00:00

📊 Introduction to Price Controls

The video begins with a warm welcome to the audience and introduces the economic topic of government price controls. Specifically, it will cover price floors and price ceilings, explaining how the government can manipulate market prices to achieve more equitable outcomes.

📈 Supply and Demand Basics

A general supply and demand graph is shown, illustrating a market in equilibrium. This graph features a downward sloping demand curve and an upward sloping supply curve intersecting at the equilibrium point (Q* and P*). The video explains that equilibrium is where quantity demanded equals quantity supplied.

🏛️ Government Interference in Equilibrium

The video discusses how the government might not be satisfied with the equilibrium price and may want to change it. They can artificially set the price above or below the equilibrium to achieve desired outcomes. This is where price controls come into play.

⬆️ Understanding Price Floors

Price floors are introduced as the minimum legal price that can be charged for a good, and they must be set above the equilibrium price to be effective. An example given is the price floor on wheat to ensure farmers receive a minimum income. However, this causes market inefficiencies and deadweight loss, depicted by a yellow triangle on the screen.

⚖️ Effects of Price Floors

The video explains the negative consequences of price floors, including excess supply or surplus, unnecessarily high-quality goods, and inefficient allocations to producers, making price floors often wasteful.

⬇️ Understanding Price Ceilings

Price ceilings are described as the maximum legal price that can be charged for a good. For them to be effective, they must be set below the equilibrium price. Rent control is provided as an example, where the government limits rent to make housing more affordable, but this also leads to market disequilibrium.

⚖️ Effects of Price Ceilings

Similar to price floors, price ceilings cause market inefficiencies such as excess demand (shortages), wasted resources, black markets, and inefficient allocations to buyers, creating another form of deadweight loss.

📉 Graphical Representation of Controls

The video connects the concepts of price ceilings and floors to graphs of shortages and surpluses, noting that government price controls cause the same market conditions as other non-price-related shocks.

🔗 Further Learning and Engagement

Viewers are encouraged to watch a linked video on shortages and surpluses. The creator also suggests leaving comments if they want a detailed video on deadweight loss or other market inefficiencies. The video concludes with a call to action to like, subscribe, and comment.

Keywords

💡Price Floor

A price floor is a legal minimum price set by the government that must be charged for a good or service. It is implemented when the government believes the market equilibrium price is too low. In the video, a price floor is used to ensure farmers are paid a minimum price for wheat, but it can lead to inefficiencies like surplus, as it disrupts the natural equilibrium between supply and demand.

💡Price Ceiling

A price ceiling is a legal maximum price that can be charged for a good or service. The government imposes it when they believe the equilibrium price is too high, such as with rent control. This policy aims to make goods more affordable but often causes shortages because the price is set below the equilibrium, leading to excess demand.

💡Equilibrium

Equilibrium in economics refers to the point where the supply and demand curves intersect, meaning the quantity supplied equals the quantity demanded at a certain price level (P*). This is the market's natural state without interference. The video explains that price controls, like floors and ceilings, disrupt this equilibrium.

💡Surplus

A surplus occurs when the quantity supplied of a good exceeds the quantity demanded, often due to a price floor set above the equilibrium price. In the video, this concept is illustrated with the example of wheat production, where a price floor ensures higher prices but results in excess supply that the market cannot absorb.

💡Shortage

A shortage happens when the quantity demanded exceeds the quantity supplied, usually caused by a price ceiling below the equilibrium price. The video uses rent control as an example, where the imposed price ceiling creates a shortage of available housing as more people demand it at a lower price than the market can supply.

💡Deadweight Loss

Deadweight loss refers to the lost economic efficiency when the market is not in equilibrium due to price controls. Both price floors and price ceilings create deadweight loss, where both consumers and producers lose out on potential benefits. The video highlights this with a visual of the 'yellow triangle,' representing the loss of surplus.

💡Supply and Demand Curve

The supply and demand curves represent the relationship between the price of a good and the quantity supplied or demanded. In the video, these curves are fundamental for explaining equilibrium, with the downward sloping demand curve showing consumers' desire for lower prices, and the upward sloping supply curve showing producers' willingness to sell more at higher prices.

💡Market Inefficiency

Market inefficiency occurs when resources are not allocated optimally, often due to external interventions like government price controls. The video explains that both price floors and price ceilings introduce inefficiencies by preventing the market from reaching equilibrium, leading to issues like surplus, shortage, and deadweight loss.

💡Binding

A price control is considered 'binding' when it has an effect on the market, meaning it alters the natural price that would occur at equilibrium. In the video, a price floor is binding if it is set above the equilibrium price, and a price ceiling is binding if set below the equilibrium price, directly impacting market outcomes.

💡Rent Control

Rent control is a real-world example of a price ceiling, where the government limits how much landlords can charge for rent. The video uses rent control to illustrate how price ceilings lead to shortages in housing, as more people want to rent at the artificially low price, but landlords supply fewer units, creating a mismatch in the market.

Highlights

Introduction of government policies focusing on price controls: price floors and price ceilings.

Explanation of a basic supply and demand graph with equilibrium price (P*) and quantity (Q*) at the intersection.

Price floors defined as a legal minimum price set by the government when it believes the equilibrium price is too low.

To be effective or 'binding,' a price floor must be set above the equilibrium price.

Real-world example of a price floor: Government setting a minimum price for wheat to ensure farmers earn a fair wage.

Price floors can lead to market inefficiencies and create a deadweight loss, reducing consumer and producer surplus.

Price floors result in excess supply (surplus), higher quality goods, and inefficient resource allocation to producers.

Price ceilings defined as a legal maximum price set by the government when it believes the equilibrium price is too high.

To be effective or 'binding,' a price ceiling must be set below the equilibrium price.

Real-world example of a price ceiling: Rent control, where governments limit how much landlords can charge for rent.

Price ceilings create market inefficiencies and deadweight loss, similar to price floors.

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

Both price floors and ceilings disrupt market equilibrium, resulting in conditions similar to shortages and surpluses.

Encouragement to view related content on shortages and surpluses, with a link to a video in the description.

Invitation to leave comments for future videos on topics like deadweight loss and other market inefficiencies.

Transcripts

Hey everyone and welcome back to the channel.  Today we're going to introduce the economic topic  

of government policies, specifically two types of  price controls that the government may implement  

into the market, and those are price floors and  price ceilings. With that said let's get into it!

Here we have a general supply and demand  graph which shows a market in equilibrium.  

If you're an economics student this should  look very familiar to you as it illustrates  

the fundamentals of supply and demand, with the  downward sloping demand curve and upward sloping  

supply curve and the point of equilibrium where  the two curves intersect. This point where the  

quantity demanded and quantity supplied are equal,  which we have denoted as Q* and they are equal at  

an equilibrium price which is P*. But suppose  that for some reason the government doesn't  

like where the equilibrium price is and they want  to change it. They have the means to freeze the  

price at an artificial level above or below the  equilibrium price or P* in an attempt to achieve  

a more equitable outcome for target members of the  market. Allow me to explain. So if the government  

believes that the equilibrium price is too low it  can impose something called a price floor. A price  

floor is a legal minimum that must be charged for  a good. In order for a price floor to be effective  

or what economists call "binding" the price floor  must be higher than the equilibrium price. A real  

life example of a price floor imposed by the  government is when they impose a price floor on  

wheat. This increases the price or the wage that  farmers get paid for producing wheat to ensure  

that they receive at least a certain amount  of money so that the toil of farming wheat  

is worthwhile. But price floors lead to market  inefficiencies, after all the market is no longer  

in equilibrium. This will lead to something  that economists call a dead weight loss where  

both producers and consumers lose some of their  surplus. This is depicted by the yellow triangle  

on screen. If you want a detailed video outlining  dead weight loss just let us know in the comments.  

Price floors lead to excess supply, also known  as a surplus, unnecessarily high quality goods,  

and inefficient allocations to producers. In  other words oftentimes price floors end up being  

wasteful. On the other hand if the government  believes that the equilibrium price is too high  

they can impose something called a price ceiling.  Opposite to a price floor a price ceiling is the  

maximum price that can be charged for good.  Once again, in order for a price ceiling to be  

effective or what economists call "binding" the  price floor must be lower than the equilibrium  

price. A real life example of a price ceiling  is rent control. This is where the government  

limits what landlords can charge for rent or a  rental increase in an attempt to make housing  

more affordable. However, similar to a price  floor a price ceiling also leaves the market in  

disequilibrium creating yet another deadweight  loss. Price ceilings lead to excess demand,  

also known as a shortage, wasted resources, black  markets, and inefficient allocations to buyers.  

Now you may recognize that price ceilings  and price floors look just like the graphs  

for shortages and surpluses respectively and  that's because in both cases government price  

controls knock the market out of equilibrium and  therefore it exhibits the exact same conditions  

as if there was a shortage or a surplus from some  other non-price related shock. If you want to see  

our video on shortages and surpluses I'll put  a link to it in the description of this video  

and I'd highly recommend you check that video  out. As I said earlier if a video dedicated to  

deadweight loss or other market inefficiencies  is something you're interested in let us know.  

And as always if you enjoyed the video and found  it helpful show us some love by liking the video,  

subscribing to the channel, and of  course leave us a comment in the  

comment section below. Thanks for watching  this video and we'll catch you in the next.