1

BUSN 405

NAME: Sayed Mohamed Al Hashmi

ID
: S0000000033
Section :
(1)
Instructor: Dr. Farid Nabti
ECON 301

1. What is a price ceiling and price floor?

A price ceiling is the maximum price a seller is allowed to charge for a product or service
A price floor is a government- or group-imposed price control or limit on how low a price can be
charged for a product.

2. Why are price ceiling and price floor binding?

A price ceiling is the maximum price that can be charged .An effective (or binding) price
ceiling is one that is set below equilibrium price.
A price floor is the minimum price that can be charged. An effective (or binding) price floor is
one that is set above equilibrium price.

3. How is price floor different from price ceiling?

A price floor is a minimum price at which a product or service is permitted to sell. The price
floor is the minimum set value. A price ceiling is a maximum price that can be charged for a
product or service and maximum set value.

4. Give examples and draw the graphs of what would happen if the government
imposed:
a. A ceiling price above equilibrium
When a price ceiling imposed by a government is higher than the market equilibrium
price, the price ceiling has no impact on the economy. It does not restrict supply nor
encourage demand.

b. A ceiling price below equilibrium

Price ceiling becomes a problem, when they are set below the market equilibrium
price. When the ceiling is set below the market price, there will be excess demand or a
supply shortage.

c. A floor price above equilibrium

Price floor does not have any impact, when they are set above the equilibrium price.

d. A floor price below equilibrium

A price floor must be higher than the equilibrium price in order to be effective.

5. What are demand shifters? Give examples

The relationship between the price and the quantity demanded for a good or service
when all other things are held constant. This is an inverse relationship- that is, when
quantity demanded increases than price decreases, and vice versa. This is known as
demand shifter.