Question

Explain why price ceilings are below equilibrium and price floors are above equilibrium

Answer 1

A price ceiling is supposed to protect consumers from high prices (for example in new york, a price ceiling (rent control) exists on some apartments to keep it affordable). Its called a ceiling because that is as high as the price can go. Take food prices, for example. If the current market equilibrium price suddenly rose to $10 per bag of rice, and a government put on a price ceiling of $15 it would not be effective - its not protecting people from the high price, because the price ceiling ($15) is actually higher than the market price ($10). But if they set a price ceiling BELOW equilibrium (e.g. $5), then it would protect consumers from that high price.

A price floor works in the opposite way. It sets a minimum price in order to protect suppliers. Again, using food as an example, a government might want to guarantee the farmers get a good price, and set a price floor. To be effective, a price floor should be ABOVE market equilibrium price. If the prices suddenly fall, and people only want to pay $2 per bag or rice, the government might put in a minimum price (a floor) of $5, ensuring producers get enough money. If they put a price floor below equilibrium (e.g. $1) then it would be ineffective in protecting producers.

So I hope that makes sense - but if you're still struggling, just try to think of it like this:
A price ceiling protects consumers by keeping prices lower than the market wants.

A price floor protects producers by keeping prices higher than the market wants.

Hopefully that answers your questions, about when a price floor & price ceiling will be effective.

Another thing to point out is that price floors and price ceilings will distort supply and demand; it will create either a shortage or a surplus. If a price floor is too high, producers will make far too much than people want to buy; if price ceilings are too low, there will be far more people trying to buy and not enough to go around. Thats why in New York, rent control means that there are always more people trying to get those apartments. While floors & ceilings are sometimes used by politicians to protect a particular group, its important to realise that it does have economic consequences, and by most economists, they are usually seen as bad things. Ideally, a market should "clear" - at equilibrium, everyone who wants to buy will be matched by everyone who wants to sell. Ceilings & floors prevent that from occuring - even though they might be effective in their main goal (to protect a consumer or producer group) the overall consequence is usually negative.