Price Ceiling vs Price Floor

Draw the line and ask which side of equilibrium it lands on

A ceiling is a horizontal line the price may not go above, so it only does anything if it sits below the equilibrium price. A floor is a horizontal line the price may not go below, so it only bites if it sits above equilibrium. A ceiling above equilibrium and a floor below equilibrium are both non-binding and change nothing, which is a favourite exam trick: the question sets a minimum wage of six dollars in a market whose equilibrium wage is nine, and the correct answer is that employment and wages are unchanged. Say so explicitly rather than describing a surplus that does not exist. Practise placing the line at /sandbox/supply-demand.

Both reduce the quantity traded, which is the point students miss

It is tempting to think a ceiling raises the amount consumed because it makes the good cheaper. It does the opposite. At the capped price, sellers are willing to supply less than before, and you cannot buy what nobody produces, so the quantity actually traded falls to the quantity supplied. Under a floor, buyers want less at the higher price, so trade falls to the quantity demanded. In both cases the short side of the market determines the outcome. Both therefore create deadweight loss, the value of mutually beneficial trades that no longer happen. Consumer and producer surplus both change, and the transfer between them runs in opposite directions: a ceiling moves surplus from sellers to the buyers who manage to buy, and a floor moves it from buyers to the sellers who manage to sell.

Naming the second-order effects earns the extra point

Rubrics often ask for a consequence beyond the shortage or surplus. Under a binding ceiling, the good has to be rationed some other way, so expect queues, waiting lists, favouritism, declining quality as sellers cut costs they can no longer recover in price, and illegal resale above the cap. Under a binding floor the surplus has to go somewhere, so either it goes unsold, or a government buys and stores it, which is how agricultural price supports work. In a competitive labour market, a binding minimum wage produces unemployment specifically because quantity of labour supplied exceeds quantity demanded, and the workers who keep their jobs are better off while those who lose them are not. Market structure changes that answer: a monopsonist already hires where MRP equals MFC and pays a wage read off the labour supply curve, so a minimum wage set between the monopsony wage and the competitive wage flattens MFC at the mandated wage and raises the wage and the number hired together, with no surplus of labour at all. Set it above the competitive wage and the ordinary surplus result returns. The monopsony diagram is worked through at /micro/factor-markets. Say which group gains and which loses; a rubric row usually asks for it.

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