Student Name: Qasim Shafi

Reg#: 2093136
Subject: Micro Economics
Instructor Name: Maryam Ali

Institution Name: NCBA & E

 Assignment#2
Ceiling & Floor Price

Definition of ceiling price:

 A price ceiling is a government-imposed limit on how high a

price can be charged on a product.

Concept of ceiling price:

If a price ceiling is placed below the market-clearing price, as Pc is in
the graph on graph paper, the market-clearing price of Pe becomes illegal.
At the ceiling price, buyers want to buy more than sellers will make
available. In the graph, buyers would like to buy amount Q4 at price Pc, but
sellers will sell only Q1. Because they cannot buy as much as they would
like at the legal price, buyers will be out of equilibrium. The normal
adjustment that this disequilibrium would set into motion in a free market,
an increase in price, is illegal; and buyers or sellers or both will be penalized
if transactions take place above Pc. Buyers are faced with the problem that
they want to buy more than is available.

Definition of Price Floor:

 A price floor is a government- or group-imposed limit on how
low a price can be charged for a product.

Concept of Floor price:

The graph on graph paper illustrates a price floor with price Pf.
At this price, buyers are in equilibrium, but sellers are not. They would
like to sell quantity Q2, but buyers are only willing to take Q3. To
prevent the adjustment process from causing price to fall, government
may buy the surplus, as the U.S. government has done in agriculture and
in precious metals. If it does not buy the surplus, government must
penalize either buyers or sellers or both who transact below the price
floor, or else price will fall. Because there is no one else to absorb the
surplus, sellers will.