Price Floors and Ceilings in an Economy - Essay Example

The paper "Price Floors and Ceilings in an Economy" is a good example of an essay on macro and microeconomics. Price floors are minimum prices set by governments and other bodies with the result that the price will not fall below a certain minimum level. Where the equilibrium set by demand and supply is below this level, the impact would be a distortion in the market. It is apparent that the firms will be attracted by the higher prices that will result in a greater supply of the relevant goods and services. The price ceiling is a legal maximum amount of the price of goods or services. Rent control is one of the examples of the price ceiling. This paper discusses the pros and cons of floors and ceilings in an economy.

       First are the pros of the price floor in an economy. One is that it leads to higher income for the producers. This is evident as there is a minimum price to which goods can be sold, and it is usually above the market price. The producers can sell their goods or services at a price that is above the normal price leading to the making of extra profit. The situation makes the supplies produce more than consumers demand. The other advantage is that there is a higher income for labor. The result of higher income is because firms can realize more profits in their operations in providing goods or services. Employees are paid well as a motivation for the consistent production of services to take advantage of the market prices (Bellinger, 2007).

        One of the cons is that there is a higher price for consumers. Price floors lead to higher prices as the minimum price is at the market price. This limits the number of consumers who can afford a particular good or service. Another disadvantage is that price floors encourage oversupply and inefficient. There is over-production by the producers so as to maximize on the prizes in the market as they enable them to make great profits. The price floors also attract other new firms to enter the market that leads to the over-supply of goods. The economy loses as there is inefficiency allocation of production and less is being sold. Price floors also lead to higher unemployment as employers tend to reduce the number of employees due to the high minimum wage (Bellinger, 2007).

      One of the advantages of a price ceiling is that it results in the affordability of goods and services. Consumers tend to demand more of the products as the price is below the equilibrium price set by supply and demand. It is apparent that there are queues for goods. Another advantage is that the price ceiling addresses to a wider section of the society. This is possible as people who earn less in the economy can afford the services and goods in the marketplace. The result is that the rich and the poor have the same purchasing power in an economy (Bellinger, 2007).

       A disadvantage of the price ceiling is that it lowers the supply of goods and services. It is apparent that the existing producers have to accept a lower price than they would set for their goods or services. The result is that there is a decrease in production and some producers withdraw from the market. Another disadvantage is that the price ceiling creates a shortage in the market for quality goods. This is because the producers will prefer using cheap raw materials for their products. The emergence of the Black Market is another disadvantage. This involves goods and services being bought and sold illegally in an economy (Bellinger, 2007).

    In conclusion, it is evident that price ceilings and floors are mechanisms used by governments in ensuring prices are appropriate for certain groups of consumers and producers. Some of the price floor pros are it leads to high income for producers and labor. The cons are higher prices for consumers and oversupply of goods. As for the price ceiling, the pros are that it leads to affordability, and it addresses a wider section of society. The cons are that it lowers the supply and leads to the emergence of Black Markets.