Price ceiling


Price ceiling

A price ceiling is a government-imposed limit on how high a price can be charged on a product. For a price ceiling to be effective, it must differ from the free market price. In the graph at right, the supply and demand curves intersect to determine the free-market quantity and price.

A price ceiling can be set above or below the free-market equilibrium price. In the graph at right, the dashed line represents a price ceiling set above the free-market price, called a non-binding price ceiling. In this case, the ceiling has no practical effect. The government has mandated a maximum price, but the market price is established well below that.

In contrast, the solid green line is a price ceiling set below the free-market price, called a binding price-ceiling. In this case, the price ceiling has a measurable impact on the market.

A price ceiling set below the free-market price has several effects. Suppliers find they can no longer charge what they had been charging for their products. As a result, some suppliers drop out of the market. This represents a reduction in the quantity supplied. Meanwhile, demanders find that they can now buy the same product at a lower price. As a result quantity demanded increases.

As a result of these two actions, quantity demanded exceeds quantity supplied and a shortage emerges. This leads to various forms of non-price competition.

Price ceilings are often intended to protect consumers from certain conditions that could make necessities unattainable. But they can also cause problems if they are used for a prolonged period of time without controlled rationing. A good example is rent control in New York City (rent control is a price ceiling on rent). When soldiers were coming back from World War II and starting families (causing a large demand for apartments), but stopped receiving pay (there was no longer a war), many could not deal with the jumping rent. The government put in price controls, so the soldiers and their families were able to pay their rent and keep their homes. However, this increased the demand for apartments and lowered the supply, meaning that all available apartments were rapidly taken, until there were none left for any late-comers.

Producer Surplus is the difference between the price for which a producer would be willing to provide a good or service and the actual price at which the good or service is sold.

Consumer Surplus is the amount that consumers benefit by being able to purchase a product for a price that is less than they would be willing to pay.

Students may often incorrectly attribute a price ceiling as being on top of a supply and demand curve when in fact, an effective price floor is positioned at the top of a supply and demand graph.

Sources

Colander, "Economics"

N. Gregory Mankiw, "Principles of Economics"

ee also

*Price floor
*General equilibrium
*Black market

External links

* [http://www.cantonfair.org.cn/en/info/news/content.asp?id=9466 Price ceiling of hotel rooms in Guangzhou during the 100th Canton Fair]
* [http://www.mises.org/story/1962 4000 Years of Price Controls] . Ludwig von Mises Institute
* [http://www.harpercollege.edu/mhealy/eco212i/lectures/5es/5es.htm The 5 E's of Economics]
* [http://www.fee.org/publications/the-freeman/article.asp?aid=3734 Censoring Pleas for Help]
* [http://demonstrations.wolfram.com/PriceControls/ Price Controls] by Fiona Maclachlan, The Wolfram Demonstrations Project.


Wikimedia Foundation. 2010.

Look at other dictionaries:

  • price ceiling — ➔ ceiling * * * price ceiling UK US noun [C] ► ECONOMICS, GOVERNMENT an upper limit set by a government on the price that can be charged for a product or service: »Recent increases in the price of gas have left many individuals asking for a price …   Financial and business terms

  • Price Ceiling — The maximum price a seller is allowed to charge for a product or service. Price ceilings are usually set by law and limit the seller pricing system to ensure fair and reasonable business practices. Price ceilings are usually set for essential… …   Investment dictionary

  • price ceiling — maximum price at which a good can be sold legally (Economics) …   English contemporary dictionary

  • price ceiling — / praɪs ˌsi:lɪŋ/ noun the highest price which can be reached …   Marketing dictionary in english

  • price ceiling — / praɪs ˌsi:lɪŋ/ noun the highest price which can be reached …   Dictionary of banking and finance

  • Ceiling (disambiguation) — Ceiling may refer to one of the following: *Ceiling, the upper surface of a room *Ceiling function in mathematics *Glass ceiling a bar to advancement of a qualified person *Ceiling (aeronautics) the maximum density altitude an aircraft can reach… …   Wikipedia

  • price floor — ➔ floor * * * price floor UK US noun [C] ► ECONOMICS, GOVERNMENT a lower limit set by a government on the price that can be charged for a product or service: » The price floor has a measurable impact on the market. → Compare PRICE CEILING(Cf. ↑ …   Financial and business terms

  • ceiling price — ➔ price1 …   Financial and business terms

  • Price gouging — is a pejorative term for a seller pricing much higher than is considered reasonable or fair. In precise, legal usage, it is the name of a felony that applies in some of the United States only during civil emergencies. In less precise usage, it… …   Wikipedia

  • Price controls — may refer to:* Price ceiling, the maximum price that can be charged * Price floor, the minimum price that can be charged …   Wikipedia