Economics: What is a Price Floor and a Price Ceiling and how does it work?

Question

Economics: What is a Price Floor and a Price Ceiling and how does it work?

Answer 1

price floors and price ceiling is setting a price on a certain good.  

Price floors sets a minimum price limit that means the price can't go lower than it possibly can. On the other hand a Price ceiling puts a maximum price limit the price can't go higher than the price you have set.

These pricing limits can create shortages and surpluses or it may have no effect depending on where supply and demand meet (equilibrium).

an effective price floor is where equilibrium price is below the price floor this causes a surplus.  This is because even though equilibrium price is 5 for example the minimum price it can go 10. This will create a surplus.  

An effective price ceiling is where equilibrium price is above the price ceiling. let's say the maximum price set is $2 but the equilibrium price is $5. This creates a shortage because the suppliers will supply when price is at $2 and many people will demand the good.  This creates a shortage.

summary:

price floor above equilibrium = surplus

price floor below equilibrium = no effect

price ceiling above equilibrium= no effect

price ceiling below equilibrium = shortage