MANAGERIAL ECONOMICS NOTES

MODULE #10: Price Ceiling & Price Floor

A. MARKET EQUILIBRIUM

Market Equilibrum - is a market state where the supply in the market is equal to the demand in the market. A
situation in which the price has reached the level when quantity supplied equals quantity demanded.
Equilibrium Price - is the price of a good/service when the supply of it is equal to the demand for it in the
market. Agreeable price between the buyers and the sellers.
Equilibrium Quantity - the quantity supplied and quantity demanded at the
Surplus - if the price is above the equilibrium value, occurs when quantity supplied exceeds quantity
demanded.
Shortage - if the price is below the equilibrium value, occurs when quantity demanded exceeds quantity
supplied.

B. PRICE CEILING AND PRICE FLOOR

Price Ceiling - a maximum price at which a certain product can be sold. Set lower than equilibrium market
price.
Price Floor - a lowest legal price a certain commodity/good can be sold. Set higher than equilibrium market
price.
Price Controls imposed by government can set a price ceiling or a maximum price at which a product can be
sold.
Republic Act No. 7581 (Price Act) - seeks to stabilize the prices of basic necessities and prime commodities
by prescribing measures against undue price increases during emergency situations.

(TRUE/FALSE)
Direction:Write TRUE if the statement is correct and FALSE if incorrect. (1 pt. each)

FALSE 1. The demand for inferior good increases when the income increases.
FALSE 2. The tendency in most markets is for price to deviate away from equilibrium, andfor quantity to
remain in equilibrium most of the time.
TRUE 3. When supply and demand both increases, equilibrium price will always increase.
TRUE 4. An increase in supply , accompanied by an increase in demand always leads to anincrease in
equilibrium quantity.
FALSE 5. A price ceiling is an imposed price above equilibrium price.
FALSE 6. When the income of an individual increases and his consumption for a product xyzdecreases, this
product is said to be a normal good.
TRUE 7. If the resulting price elasticity of demand is greater than 1 then the product is saidto have an elastic
demand
FALSE 8. When the demand for product x decreases as the price of product y increases, thesaid products are
considered as substitutes.
TRUE 9. High definition televisions sets can be considered a luxury good.
TRUE 10. Artificial shortage can happen if supplier or sellers will hoard the supply of theproduct.