Ceiling and Floor Prices

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Ceiling and Floor Prices

The United States government is known for its laissez faire approach to business. However, at times the government must intervene and take control of prices. When this happens, it is said that a ceiling or floor price has been put into effect (according to the price change restrictions).

A ceiling price is usually set below the EP and it benefits the buyer. The reason for a ceiling price is to help keep prices down when a certain item is in great demand. According to the basic principles of micro economics, the seller will raise the prices of products in great demand so they ( the seller) can profit the most. After all, the seller’s objective in his business is to make the most profit possible at the expense of the buyer. These government imposed prices help the buyer in the sense that the price will not soar past a certain point so that those with a lower income can still afford the item. When the ceiling price is placed above the EP, there is a chance of a short term surplus that will force the price of the item down, which in turn, will set a new EP for it.

A negative point about ceiling prices is that they create shortages, because the government doesn’t control how much of that item a person can buy. Since shortages don’t help people, ceiling prices aren't used often. One will most likely see government imposed ceiling prices used at times such as national emergencies, war time, or during famines, so that sellers don’t go out of hand and start charging higher than normal prices. (e.g. A day after the Northridge Quake, many vendors were selling water more than 3 times its original price)

Another government-imposed price is the floor price. The floor price is the opposite of the ceiling price. Floor prices are usually set above the EP and benefit the producers. An example of this is shown in the agriculture industry. Since farming is so competitive, prices between farmers are always being lowered. These lowered prices result in many farmers going broke, because they can’t afford to stay in business. By using floor prices, the farmers will have to charge an amount by which they can profit and not have to worry that their competitor has a lower price.

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