Market Mechanism — Part 2: Price Ceilings and Price Floors: visual lesson, ISC Class 12 Economics

Lesson

When the Government Fixes Prices

Part 2 — price ceilings and price floors, and the minimum support price for crops.

In this lesson you will

Explain why a price ceiling below equilibrium causes a shortage, rationing and black markets
Explain why a price floor above equilibrium causes a surplus, using minimum support prices
Calculate shortages and surpluses from demand and supply equations
Weigh the gains and costs of price controls

Part 2 at a glance

Concept

Two-row table: a price ceiling is a maximum set below equilibrium to protect consumers, a price floor is a minimum set above equilibrium to protect producers, each with an imagined example
Control	Set where	Usual aim	Imagined example
Price ceiling (maximum)	Below equilibrium	Protect consumers	Atta in a cut-off hill district
Price floor (minimum)	Above equilibrium	Protect producers	Support price for lentils

Diagram

Imagined hill district: Qd = 200 − 4P, Qs = 6P − 100.

At a ceiling below E, quantity demanded exceeds quantity supplied.