Introduction

After you have worked through this section of the learning unit, you should be able to:

  • distinguish between a price ceiling and price floor

One key way for a government to intervene in the market is through price controls. A price control is a regulation that prevents a price from rising and/or falling beyond a certain level.

Price Ceiling

When a price control measure establishes an upper limit, it is a price ceiling. For example, government may believe that the market price of bread is too high, and to help poor households, it puts a price ceiling on the price of bread. It is then illegal to charge a price higher than the ceiling price.

Price Floor

When a price control measure establishes a lower limit, it is a price floor. An example of a price floor is the minimum wage, which makes it illegal to pay a person less than the minimum wage.

Activity

Which one of the following is an example of a price ceiling?





Think again.  A price ceiling occurs when the government puts a legal upper limit or maximum on the price that can be charged for a good or service.

The highest price or lowest price that were paid for something does not imply it is a legally binding price and is therefore neither a price ceiling nor a price floor.

Think again.  A price ceiling occurs when the government puts a legal upper limit or maximum on the price that can be charged for a good or service.

The highest price or lowest price that were paid for something does not imply it is a legally binding price and is therefore neither a price ceiling nor a price floor.

Think again.

A price ceiling occurs when the government puts a legal upper limit or maximum on the price that can be charged for a good or service. A legally binding minimum price is a price floor.

Correct.

A price ceiling occurs when the government puts a legal upper limit or maximum on the price that can be charged for a good or service. In this case, the supplier may not charge a price higher than R2 500 for a subject.

Which one of the following is an example of a price floor?





Think again.  The highest price or lowest price that were paid for something does not imply it is a legally binding price and is therefore neither a price ceiling nor a price floor.

Think again.

The highest price or lowest price that were paid for something does not imply it is a legally binding price and is therefore neither a price ceiling nor a price floor.

Correct.

A price floor occurs when the government puts a legal lower limit or minimum on the price that can be charged for a good or service. In this scenario, the government imposes a legal lower limit of R20 per kg of sugar. This implies that supplier may not charge a price lower than R20 per kg.

Think again.

A price floor occurs when the government puts a legal lower limit or minimum on the price that can be charged for a good or service.  The legally established maximum price for university fees is an example of a price ceiling.