Price ceiling vs. Price Floor

Price ceiling
In a competitive market, the market price is the quilibrium price (P_E) at which the quantity demanded equals to the quantity supplied.

If Pceiling greater than P_E -> no effect
If Pceiling smaller than P_E ->quantity demanded > quantity supplied, i.e. shortgage created

The shortage will result in

• Long queue of buyers
• Discrimination by sellers, e.g. provide goods only to family and friends
• Bribes to sellers, some pay extra under the table
• Reduced quanlity of the goods
• Black markets

Price floor
The minimun price for a good or service.

If Pfloor smaller than P_E -> no effect
If Pfloor greater than P_E -> quantity supplied > quantity demanded, i.e. surplus resulted -> market inefficiency

Effect of minimum wage

• If minimum wage is set below the equilibirm market wage for low-skilled workers, then below will be resulted:
  - Increase in unemployment rate
  - Decrease in non-monetary benefits for workers
  - Firms substitue more than the efficient amount of capital of labour