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
Price Ceiling: Legal maximum on the price at

Price Floor: Legal minimum on the price at
which a good can be sold
which a good can be sold
Two outcomes:
1. If price ceiling is higher than or equal to
equilibrium price, it is not binding and has no
effect on the price or quantity sold

2. If the price ceiling is lower than the
equilibrium price, the ceiling is a binding
constraint and a shortage is created


If shortage occurs (and price can’t be
adjusted), a method for rationing the good
must be developed
Not all buyers benefit from a price ceiling
because some will be unable to purchase the
product


Lines at the Gas Pump
Rent Control in Short Run & Long Run

If price floor is lower than or equal to the
equilibrium price, it is not binding and has no
effect on the price or quantity sold

If the price floor is higher than the
equilibrium price, the floor is a binding
constraint and a surplus is created

The Minimum Wage

Who bears the burden of taxation?


Does it affect supply and/or demand?
Demand curve shifts left/down by the amount
of the tax
Amount = tax


Because market price falls when tax is
introduced, sellers receive less than when
market worked freely.
Buyers now pay more with the tax, so they
are worse off as well.
So… taxes discourage market activity (Q drops)
and buyers + sellers share burden of taxes.


Does it affect supply or demand?
The Supply curve shifts left/upward by
exactly the size of the tax


With upward supply shift, equilibrium
quantity will fall and price that buyers pay will
go up, but the amount sellers receive after
paying the tax will go down.
Thus taxes on buyers and taxes on sellers are
equivalent – both buyers & sellers share the
burden of the tax


General rule: Tax burden falls more heavily
on the side of the market that is less elastic
Therefore, it is not very likely that a tax will
be split 50-50

Who really pays the tax?
1.
2.
3.
4.
5.
Increase demand, causing
P & Q to rise
Increase supply, causing P
& Q to rise
Decrease supply, causing
P to rise & Q to fall
Decrease demand,
causing P to rise and Q to
fall
Decrease supply, causing
both P & Q to fall
0%
1.
54%
29%
8%
2.
8%
3.
4.
5.
1.
2.
3.
4.
5.
Shift supply to the left,
raising P & lowering Q
Shift demand to right,
raising both P & Q
Shift demand to the left,
lowering both P & Q
Shift supply to the right,
lowering P & raising Q
Shift demand to the left,
8%
lowering P & raising Q
1.
75%
13%
4%
2.
0%
3.
4.
5.
1.
2.
3.
4.
5.
More of the tax the
92%
producer will pay
More of the tax the
consumer will pay
More the tax will be split
equally between the
consumer & producer
Less likely the tax will
have an effect on price
None of the above
1.
4%
2.
0%
3.
0%
4.
4%
5.