Price Flooring

A price floor is the lower boundary on the price of a commodity in the market. Governments
usually set up a price floor in order to ensure that the market price of a commodity does not
fall below a pre-set lower boundary.
Two types price flooring:
i) Binding price flooring
ii) Non-binding price flooring

Price Ceiling
A price floor is the lower boundary on the price of a commodity in the market. Governments
usually set up a price floor in order to ensure that the market price of a commodity does not
fall below a pre-set lower boundary.
Types of price ceiling:

i) Binding price ceiling

ii) Non-binding price ceiling
 Difference between binding and non-binding price flooring
i) Binding price flooring: A binding price floor is one that is greater than the
equilibrium market price. Consider the figure below:
The equilibrium market price is P* and the equilibrium market quantity is Q*. At the price
P*, the consumers’ demand for the commodity equals the producers’ supply of the
commodity. The government establishes a price floor of PF. Therefore, prices in the market
can’t fall below PF.

At price PF, consumer demand is QD (less than Q* due to downward sloping demand curve),
and producer supply is QS (more than Q* due to upward sloping supply curve). After the
establishment of the price floor, the market does not clear, and there is an excess supply of
amount QS-QD.

Producers are better off as a result of the binding price floor if the higher price (higher than
equilibrium price) makes up for the lower quantity sold. Consumers are always worse off as a
result of a binding price floor because they must pay more for a lower quantity.

ii) Non-Binding Price Floor: A non-binding price floor is one that is lower than the
equilibrium market price. Consider the figure below:

The equilibrium market price is P* and the equilibrium market quantity is Q*. At the price
P*, the consumers’ demand for the commodity equals the producers’ supply of the
commodity. The government establishes a price floor of PF.

At price PF, consumer demand is QD (more than Q* due to downward sloping demand
curve), and producers supply is QS (less than Q* due to upward sloping supply curve).
However, the non-binding price floor does not affect the market. The market price remains
P* and the quantity demanded and supplied remains Q*. Producers and consumers are not
affected by a non-binding price floor.

Difference between binding and non-binding price ceiling

i) Binding price ceiling: An effective price ceiling is called a binding price

ceiling. A binding price ceiling is when the price ceiling that is set by the
government is below the prevailing equilibrium price. For example, if the
equilibrium price for rent was Rs.10,000 per month and the government set the
price ceiling of Rs. 8000, then this would be called a binding price
ceiling because it would force landlords to lower their price from Rs. 10,000 to
Rs. 8000. This can be depicted in a supply and demand diagram, as such:

Because the price PCPC is less than PEPE the price ceiling is binding.

ii) Non-binding price ceiling: If the equilibrium price is already lower than the
price ceiling, the price ceiling is ineffective and called a non-binding price
ceiling. For example, suppose that the prevailing equilibrium price was
Rs.10,000 still and the government set the price ceiling to be Rs.13,000 the
price would still be Rs. 10,000 not Rs.13,000. Remember, the price ceiling is
a maximum price for which firms can sell their goods and services. The
government setting a maximum price should not affect thei r pricing decisions
as if they were able to charge a price of $130, they would already do it, as it
would earn them more profit.

An example of a non-binding price ceiling in the supply and demand diagram

looks as follows:
Because the price is set above the equilibrium level, it will have no impact on the
price that is charged and the equilibrium price will prevail.

Done by:

Argho Mandal

1923008