The concept of Price Ceiling and Price floor

 

The easy way to understand the concept of price ceiling and price floor.

It is the government intervention to protect the customer and producer.

The price ceiling is to protect the customer from paying more money because of shortage of supply.

When price below from the equilibrium, there has occur excess demand where the demand is more than the supply on the economy. When this occur, the buyer will bit up the price to encourage the supplier supply more goods until it reach up to equilibrium point. So, government want to protect the customer by put price ceiling to protect the customer from purchasing the goods in high price. When there has price ceiling, there will be excess demand on the economy.

The price floor is to protect the producer from incur huge losses because of shortage of demand.

When price above from the equilibrium, there has occur excess supply where the supply is more than the demand on the economy. When this occur, the supplier will low the price to encourage the buyer buy more goods until it reach down to equilibrium point. So, government want to protect the supplier by put price floor to protect the supplier from reducing to low price. When there has price floor, there will be excess supply on the economy.

How the government do with excess demand and excess supply on the economy?

P/s : Fikir jangan tak fikir... Haha