The price ceiling is the maximum price a seller is allowed to charge for a product or service. An impact on society includes when the prices are so high of a product, that no one can buy it. A price floor is the lowest legal price a product or service can be sold at. When market price is at its lowest, it may still be too high for consumers to purchase products. Governments can intervene for any purpose, and they are the ones who set these price controls.
Governments may intervene in the market system to fix prices above or below equilibrium if they believe that it is in the public interest to do so.Governments may intervene in the provision, regulation, maintenance and management of public goods to maximise the benefits to the community from their use, and to prevent over exploitation or congestion of the resource. A price ceiling is where a maximum price for a good or service is established below market equilibrium. It can make products more affordable for consumers, by having a level in which prices cannot rise above.
This means that the prices consumers have to pay for a product are lower than what they would be at market equilibrium price.For example, if the government think that people need bread to live, and that the market price of bread is too high, then they might install a price ceiling. The price of bread could be $3 a loaf, and the government may reduce the price to $2 a loaf. This would have a large impact on consumers as it is necessary that they eat bread to survive.
This means that they would have to pay less for bread and be able to purchase more. The following graph represents the market for bread. At equilibrium, the price will be p*, and the quantity will be q*.When the price ceiling is added, qs becomes the new quantity supplied, qd is the quantity demanded, and pceiling is the price. The blue S stands for supply, and the red D stands for demand.
Although this price control seems to have a good effect on consumers, this isn’t always the case. If the price ceiling is set below the market price then there will be an increase in demand and a decrease in supply. Because consumers aren’t paying as much for the product, producers will not be able to produce as much at the lower price, and consumers will demand more because the product is cheaper.The end result will be consumers not being able to buy the product since there is not enough being made. For example, the price of milk was $2 per litre, and has now been reduced to $1 per litre. This will be great for consumers as they can buy more milk for less, until it runs out.
Therefore price ceilings have a good impact on consumers. For producers, price ceilings don’t have as good an impact as it does on consumers. Since the consumers are paying much less money for goods and services, they simply cannot afford to make any products.It will have a harmful effect on producers, as their surplus will decrease, resulting in them not making as much product. For example, if the price of lettuce decreases from $7 to $5, then that means a decrease in the amount of money producers are getting. They will not have enough money to grow lettuce, so there will be none or little lettuce harvested to be sold.
This means that price ceilings have a large impact on producers, and not in a good way. If the government puts in a price ceiling, then the quantity demanded will exceed the quantity supplied, meaning that not enough goods or services will be supplied to satisfy demand.This situation is called a shortage. Because price ceilings are installed in the interests of consumers, the government has to decide which situation is preferable for them: not being able to afford a product, or not having enough of the product to go around. For example, the market price for petrol was $2 a litre, but the government set a price ceiling of $1 a litre.
Since so many people would buy a lot more petrol, it would soon run out. This is where governments may have to ration out the petrol. This occurred in America during the 1970’s, when cars had to line up on the street in order to get some government rationed petrol.The opposite of a price ceiling is a price floor. A price floor is an artificially introduced minimum for the price of a good. In most cases, the price floor is above the market price.
For example, price floors are sometimes used for agricultural products. The market price can sometimes be so low that farmers cannot make enough money to support themselves. In such cases, the government steps in and sets a price floor, which can cause problems of its own. The following graph represents the market for bread.
At equilibrium, the price will be p*, and the quantity will be q*.When the price floor is added, qs becomes the new quantity supplied, qd is the quantity demanded, and pfloor is the price. The blue S stands for supply, and the red D stands for demand. When the price is raised above p*, the quantity supplied exceeds the quantity demanded.
This is called a surplus: farmers produce many more crops than buyers want to buy at the new, higher price. Price floors don’t have the greatest impacts on consumers. As they increase the price of products, consumers are less likely to purchase them.For example, the price of milk was $1 per litre, and has now increased to $3 per litre. This isn’t good for consumers as they now need to pay more for an everyday item.
Therefore price floors have a severe impact on consumers. Unlike consumers, price floors are beneficial for producers. Since the consumers now have to pay more money for their products, producers will get more revenue. For example, if the price of lettuce increases from $5 to $8, then consumers will still buy the same amount of product, increasing the amount of money producers are getting.
This means that price floors have a great impact on producers. If the government puts in a price floor, then the quantity supplied will exceed the quantity demanded, meaning that too many goods or services will be supplied. This situation is called a surplus. Because price floors are installed in the interests of consumers, the government has to decide which situation is preferable for them: being able to afford a product, or not having enough of the product to go around.
For example, the market price for petrol was $1 a litre, but the government set a price floor of $3 a litre.Since so many people wouldn’t buy as much petrol, there would soon be too much. This is where governments may have to ration out the petrol. In conclusion, price ceilings are the maximum price a seller can charge the consumer, and price floors are the minimum price. These price controls have both effective and ineffective impacts, depending on which groups. Governments are the ones who set price ceilings and price floors, and only intervene in markets in the interest of consumers and what works best for them.
