Price Ceilings and Floors- Micro Topic 2.8 - YouTube

Hey! How you doing Econ students?

This is Mr. Clifford.

Welcome to ACDC Econ.

Right now I'll talk about price controls.

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Right now at the end of 2014,

gas prices in California are around $4 a gallon

It's actually a little less

but let's just keep it simple and say equilibrium and

price per gallon is $4 and the quantity is 100.

So I'm tired of paying high gas prices.

I think we should go to the government and convince them to get the prices lowered

so the government should make a law and say

that we should lower the price below equilibrium

to let's say $1

This is the idea of something called a "Price Ceiling".

A Price Ceiling is the cap on a price that the government sets

so the price cannot go up to equilibrium.

Again, the ceiling is the maximum price a seller is allowed to charge.

So do you support the idea of having the price down here at one dollar

and we all get cheaper gasoline?

It turns out that's why you're in this class.

If you didn't take Econ, you would think that lowering the price would mean we could have more gasoline

and you would actually vote for this

and say, "Hey this is a great idea!"

BUT taking this class helps you realize this is a HORRIBLE idea.

If we lower the price for gasoline, that means the quantity demanded is going to increase right here to 200.

So at a lower price, consumers will want to buy more gallons of gasoline

But when the price falls, the quantity supplied is going to fall.

In this case, it's going to fall to 50.

Remember: at a low price, producers don't want to produce very much.

If they only produce 50, that's going to mean we're going to have a shortage of 150 gallons of gas

So it turns out that this law, designed to help consumers by lowering the price,

actually hurts consumers because now we get less quantity.

Instead of 200 gallons of gasoline produced, now we only have 50 gallons produced.

This is the idea of Price Controls - when government comes in to control and manipulate prices

Now there are some exceptions but for the most part competitive markets should be left alone

because the government may come in, it's going to mess it up, and cause a shortage or a surplus

or some misallocation of resources.

Another example of a Price Control is something called a Price Floor

A Price Floor is a minimum price that buyers are expected to pay for a product.

So let's assume that the government really wanted to help corn producers by keeping prices artificially high

Let's assume that the equilibrium price for corn is $10 for let's say 50 units.

[quietly] What's a unit of corn?

[quietly] Is it like.. a gaggle.. of corn?

[quietly] Is it like a box of corn?

Again, let's say that the government comes and says,

"Listen, that price is too low. $10 is not enough for our farmers."

"We have to increase that price."

So they set a Price Floor up here at $30.

Now when the price goes up, the quantity supplied goes up. Producers want to produce more

And in this case they want to produce 100

At that new price of $30, consumers only want to buy 30 units.

So it turns out this policy actually doesn't even help those producers because nobody's buying the corn.

And of course there are exceptions to this but in general competitive markets should be left alone.

A floor is going to lead to a surplus

And a ceiling is going to lead to a shortage

Now it's really easy for students to get confused about this.

They usually think a ceiling should go above equilibrium because a ceiling is high, right?

It's a ceiling.

But that's not true. A ceiling has to go below equilibrium if it's going to have an effect on the market.

Think about it. If a ceiling is above equilibrium it's not going to have any effect

If the government says, "You can't sell gasoline for more than $30,000!"

businesses won't and aren't even trying to sell it above $30,000.

So to have an effect, a Price Ceiling (a maximum) has to be below equilibrium.

Now this confusion also applies to a floor. A floor has to be above equilibrium

For example, if they said, "You can't sell corn for less than 10 cents!"

The producers are going to be like, "We're not trying to sell it for less than 10 cents".

So it's going to have no effect.

All that being said, A ceiling goes below equilibrium and a floor goes above.

It doesn't matter if you're enrolled in Macroeconomics or Microeconomics

Because you're learning exactly the same concepts up to this point

In Unit 1 you talked about Production Possibilities Curve

and scarsity and absolute comparative advantage

and now you've learned about supply and demand

and shifts in the curve and ceilings and floors

But if you're taking Macroeconomics

Now you're going to talk about the overall economy

You'll begin analyzing GDP, unemployment, inflation

and eventually something called Aggregate Demand and Aggregate Supply

which, by the way, is why you should really understand

supply and demand in markets, like we've been covering.

If you're learning Microeconomics you're going to stick with markets but go into a lot more detail

For example, you're going to talk about taxes and quotas and elasticity

and a lot more concepts that have to do with this supply and demand curve.

Now if you haven't already been there, be sure to go to my channel menu.

This has all the links you need for Micro- and Macroeconomics.

Another couple videos you might keep in mind

Are these two videos.

These are the Micro- and Macroeconomics summaries

In these videos I do a really quick explanation of all those key concepts

And again, I give you links to different videos on my YouTube channel.

Alright! Don't forget to subscribe and come back often

Because I'm making a BUNCH of new videos, alright?

Til next time!

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