Using suitable illustrations, explain briefly the following:1. Do price ceilings cause shortages or surpluses? (3marks)2. Do price floors cause shortages or surpluses

1. Do price ceilings cause shortages or surpluses?

Price ceilings are government-imposed limits on the highest price that can be charged for a good or service. They are typically set below the equilibrium price.

Illustration: Let's consider the market for rental apartments. If the government sets a price ceiling below the equilibrium rent, it means landlords cannot charge more than this price.

At this lower price, the quantity of apartments demanded exceeds the quantity supplied. This is because consumers are willing to rent more apartments at the lower price, but landlords are less willing to rent out their apartments because they are receiving less money. This creates a shortage of apartments.

So, price ceilings, when set below the equilibrium price, cause shortages.

2. Do price floors cause shortages or surpluses?

Price floors are the opposite of price ceilings. They are government-imposed limits on the lowest price that can be charged for a good or service. They are typically set above the equilibrium price.

Illustration: Let's consider the market for labor (i.e., jobs). If the government sets a price floor above the equilibrium wage (a minimum wage), it means employers cannot pay workers less than this wage.

At this higher wage, the quantity of labor supplied exceeds the quantity demanded. This is because more people are willing to work at the higher wage, but employers are less willing to hire workers because they have to pay them more. This creates a surplus of labor, or in other words, unemployment.

So, price floors, when set above the equilibrium price, cause surpluses.