COLEGIO DE LA PURISIMA CONCEPCION

The School of the Archdiocese of Capiz

Roxas City

College of Business, Management and Accountancy

BA 1 – BASIC MICROECONOMICS
First Semester 2020-2021

Name: LIRA S. BALASABAS

Activity 5

1. Define price ceiling and price floor and give an example of each. Which leads to a shortage?
Which leads to a surplus? Why?

Answer: A price ceiling is a legal maximum on the price at which a good can be sold. Examples
of price ceilings include rent control, price controls on gasoline in the 1970’s, and price ceilings
on water during a drought. A price floor is a legal minimum on the price at which a good can be
sold. Examples of price floors include the minimum wage and farm-support prices. A price
ceiling leads to shortage, if the ceiling is binding, because suppliers won’t produce enough goods
to meet demand unless the price is allowed to rise above the ceiling. A price floor leads to a
surplus, if the floor is binding, because suppliers produce more goods than are demanded unless
the price is allowed to fall below the floor.

2. Elucidate how price ceilings and price floor affect market outcomes?

Answer: When a price ceiling is set below the equilibrium price, quantity demanded will
exceed quantity supplied, and excess demand or shortages will result. When a price floor
is set above the equilibrium price, quantity supplied will exceed quantity demanded, and
excess supply or surpluses will result.

3. Elucidate how taxes on sellers and buyers affect market outcomes?

Answer: Because the tax on buyers makes buying the good less attractive, buyers demand
a smaller quantity of the good at every price. As a result the demand curve shifts to the
left. ... Because sellers sell less and buyers buy less in the new equilibrium, the tax on the
good reduces the size of the goods market.

Price ceilings prevent a price from rising above a certain level. When a price ceiling is set below
the equilibrium price, quantity demanded will exceed quantity supplied, and excess demand or
shortages will result. Price floors prevent a price from falling below a certain level.
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