Price floors and Price ceilings

Question 1

What is the purpose of a price ceiling ?

Answer 1

• A price ceiling is to prevent a price from rising above a certain level
• When a price ceiling is set below the equilibrium price, quantity demanded will exceed quantity supplied

Question 2

What is the purpose of a Price floor ?

Answer 2

• Price floors prevent a price from falling below a certain level
• When a price floor is set above the equilibrium price, quantity supplied will exceed quantity demanded, and excess supply or surplus will result.

Question 3

Price Control

Answer 3

• When government laws regulate prices instead of letting market forces determine prices, it is known as price control

Question 4

Government Intervention

Answer 4

Government intervention is any action carried out by the government that affects the market with the objective of changing the free market equilibrium / outcome.