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Economics 2

Lecture 9: Supply and Demand, Part 4

price ceilings and floors

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Price Ceilings and Floors

A price floor is a legal minimum price. An example is the minimum wage. A price floor creates an excess supply or surplus. A price ceiling is a legal maximum price. Rent control is an example. A price ceiling leads to a situation of excess demand or a shortage.

There are 4 alternatives to the market as a way of allocating a scarce good:

1. standing in line
2. preferred customers
3. rationing by coupon
4. black markets

David A. Latzko Business and Economics Division Pennsylvania State University, York Campus office: 13 Main Classroom Building phone: (717) 771-4115 fax: (71>7) 771-4062 e-mail: web: www.yk.psu.edu/~dxl31