Final answer:
In economics, price floors and price ceilings are used to control the price of a good or service. Price ceilings prevent prices from rising above a certain level, leading to excess demand or shortages. Price floors prevent prices from falling below a certain level, leading to excess supply or surpluses.
Step-by-step explanation:
In economics, price floors and price ceilings are used to control the price of a good or service. A price ceiling is a maximum price set by the government, while a price floor is a minimum price set by the government.
Price ceilings are typically set below the equilibrium price. This prevents the price from rising above a certain level. When a price ceiling is set below the equilibrium price, it creates excess demand or shortages because quantity demanded will exceed quantity supplied. Price floors, on the other hand, are typically set above the equilibrium price. This prevents the price from falling below a certain level. When a price floor is set above the equilibrium price, it creates excess supply or surpluses because quantity supplied will exceed quantity demanded.
For example, let's say the government sets a price ceiling on rent. If the equilibrium rent price is $1000, and the government sets a price ceiling of $800, there will be excess demand for rental housing because tenants are willing to pay more than the ceiling price. This can lead to a shortage of available rental units. Conversely, if the government sets a price floor of $1200, there will be excess supply of rental housing because landlords are willing to rent out units at the floor price even if there is not enough demand at that price. This can lead to a surplus of vacant rental units.