Economics Project

ON
TOPIC: PRICE CEILING & PRICE
FLOOR

GUIDED BY: PROF. NIMAI CHARAN

SWAIN
Submitted by:
Ansuman ray : 16202008
Arnav avijeet yadav : 16202011
Arupa rath : 16202012
Anuradha mishra : 16202010
Amit kumar tiwary : 16202007
AsHad taj : 16202013
Acknowledgement

With sincere regards, we wish to acknowledge

our gratitude to the contributions of people
who helped us at every stage of the project.

We would like to express our sincere thanks to

Prof. Nimai Charan Swain whose able
guidance & consistent support has helped to
make this project successful.

INTRODUCTION
Price controls are government-mandated legal minimum
or maximum prices set for specified goods, usually
implemented as a means of direct economic intervention
to manage the affordability of certain goods.
Governments most commonly implement
price controls on staples, essential items such as food or
energy products. Price controls are of two types where:
Price controls that set maximum prices are price ceilings,
while price controls that set minimum prices are price
floors.

PRICE CEILINGS
A price ceiling is a government-
imposed price control or limit on how high a price is
charged for a product. Governments intend price
ceilings to protect consumers from conditions that
could make commodities prohibitively expensive.
When a price ceiling is set, a shortage occurs. For
the price that the ceiling is set at, there is more
demand than there is at the equilibrium price.
There is also less supply than there is at the
equilibrium price, thus there is more quantity
demanded than quantity supplied.

GRAPHICAL REPRESENTATION
Price Ceiling Advantages
Price ceilings help prevent suppliers from engaging
in price gouging, or charging outrageously high
prices for limited goods or services simply because
they are able to. Price ceilings are also beneficial for
keeping the cost of living affordable during periods
of high inflation. Inflation describes the trend of
prices for goods and services to gradually increase
over time. During high inflationary periods, prices
increase faster than incomes, which reduce the
dollar’s purchasing power, making price ceilings
necessary for consumers to maintain their standard
of living.

Price Ceiling Disadvantages

Price ceilings can have negative impacts on the
marketplace too. Suppliers are discouraged from
producing more of an item when they can’t set their
own prices, therefore, supply of key resources will
decline, reducing availability to the market. Price
ceilings also reduce the quality of products, as
suppliers have less financial resources to reinvest in
their business.

Black Market: For those lucky enough to get some

of the short supply, they are often better off selling
what they have obtained to the demanders that will
get more benefit out of it. In some cities there have
been ceilings put on the apartment rent. While the
demand for apartments increases, the rent remains
the same. When some renters are ready to move,
they sublease their apartment instead of ending
their contract. If they were renting for $500, but
someone is willing to pay $1000, then the sublease
can continue paying $500 and pocket the extra
$500 he gets from the sublease.

Rationing: If a ceiling is to be imposed for a long

period of time, a government may need to ration
the good to ensure availability for the greatest
number of consumers. One way the government
may ration the good is to issue ticket to consumers.
A government will only allow as much of good to be
out in the marketplace as there are available
tickets. To obtain the good, the consumer must
present the ticket and the money to the vendor
when making the purchase. This is generally
considered a fair way to minimize the impact of a
shortage caused by a ceiling, but is generally
reserved for times of war or severe economic
distress.

Price Floor
A price floor is the lowest legal price a commodity
can be sold at. Price floors are used by the
government to prevent prices from being too
low.The most common price floor is the minimum
wage--the minimum price that can be paid for
labor. Price floors are also used often in agriculture
to try to protect farmers.For a price floor to be
effective, it must be set above the equilibrium price.
If it's not above equilibrium, then the market won't
sell below equilibrium and the price floor will be
irrelevant.

GRAPHICAL REPRESENTATION
ADVANTAGES
An example of a price floor is minimum
wage laws; in this case, employees are the
suppliers of labor and the company is
the consumer. When the minimum wage is set
above the equilibrium market price for unskilled
labor, unemployment is created (more people
are looking for jobs than there are jobs
available). A minimum wage above the
equilibrium wage would induce employers to
hire fewer workers as well as allow more people
to enter the labor market; the result is a surplus
in the amount of labor available. However,
workers would have higher wages. The
equilibrium wage for workers would be
dependent upon their skill sets along with
market conditions.
This model makes several assumptions which
may not hold true in reality, however. It
assumes the costs of providing labor (food,
commuting costs) are below the minimum
wage, and that employment status and wages
are not sticky. Some current research has
shown that in the US, at least, increases in the
minimum wage have not led to increased
unemployment. Unemployment in the United
States, however, only includes participants of
the labor force, which excludes 37.2% of
Americans as of June 2016.

DISADVANTAGES
A price floor set above the market equilibrium
price has several side-effects. Consumers find
they must now pay a higher price for the same
product. As a result, they reduce their
purchases or drop out of the market entirely.
Meanwhile, suppliers find they are guaranteed
a new, higher price than they were charging
before. As a result, they increase production.
Taken together, these effects mean there is
now an excess supply (known as a "surplus") of
the product in the market to maintain the price
floor over the long term. The equilibrium price is
determined when the quantity demanded is
equal to the quantity supplied.
Further, the effect of mandating a higher price
transfers some of the consumer
surplus to producer surplus, while creating
a deadweight loss as the price moves upward
from the equilibrium price.

CONCLUSION
Generally price controls distort the working
of the market and lead to over supply or
shortage. They can exacerbate problems
rather than solve them. Nevertheless there
may be occasions when price controls can
help for example, with highly volatile
agricultural prices.

BIBLIOGRAPHY
Slideshare.com
Wikipedia.com
Fundamentalfianace.com