Graphing Exercise:
Price Ceilings and Price Floors
Government authorities often feel political pressure that a market price is either unfairly
high to buyers or unfairly low to sellers. Sometimes the government responds by establishing
a legal limit on how high or low the price may go. Prices at or below an established ceiling
and prices at or above a floor are legal but disrupt the rationing function of prices by
creating either shortages or surpluses.
Exploration: How do price controls affect the ability of markets to allocate goods
and services?
The graph shows a typical market in equilibrium at price Pe. To illustrate the
impact of an effective price floor, click inside the red box; click inside the blue box to
illustrate an effective price ceiling. Once a ceiling or floor has been established, you can
drag on the green triangle price slider to adjust prices within the legal range.
How will a price floor affect a competitive
market?
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