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Which of the following best describes how to illustrate a binding price floor on a supply and demand graph?
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5. Consumer and Producer Surplus; Price Ceilings and Price Floors
Price Ceilings, Price Floors, and Black Markets
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If a price ceiling is set above the equilibrium price in a market, what is the most likely outcome?
A
A surplus will occur because the price is forced above equilibrium.
B
A shortage will occur because the price is forced below equilibrium.
C
Black markets will immediately emerge to circumvent the price ceiling.
D
The price ceiling will have no effect on the market outcome.
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Understand what a price ceiling is: it is a legal maximum price that sellers can charge for a good or service.
Recall that the equilibrium price is where the quantity demanded equals the quantity supplied in a market without any restrictions.
Analyze the effect of a price ceiling set above the equilibrium price: since the ceiling is higher than the market-clearing price, it does not restrict the price from reaching equilibrium.
Recognize that because the price ceiling is not binding (it is above equilibrium), the market price will remain at equilibrium, so there will be no shortage or surplus caused by the ceiling.
Conclude that the price ceiling set above equilibrium has no effect on the market outcome, meaning supply and demand remain balanced at the equilibrium price.
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