Question

A. Describe circumstances where price ceilings and price floors might be appropriate.

Answer 1

Answer:

A. Price Ceiling: Staple Food (e.g. bread)

Price Floor: Minimum Wage

B. Protected civilians from high prices BUT shortage led to a rationing system

C. War industries were already using too many goods and civilians’ standard of living had to be prevented from falling too low.

Explanation:

A. A price ceiling is the maximum amount that can be charged for a particular good or service. In order for a price ceiling to be effective, it should be below the market equilibrium point where supply meets demand. Price ceilings are commonly set for staple foods and essential items such as bread or energy in order to prevent them from rising too high and being unaffordable by consumers.

A price floor is the minimum price that can be charged for a particular good or service. In order for a price floor to be effective, it should be above the market equilibrium point where demand meets supply. A common example is minimum wage. This is imposed in order to protect employers from exploiting laborers and paying them low wages for their service. With a price floor, paying below the minimum wage is an offense. This also helps to reduce unemployment since people now have an incentive to work due to higher pay.

B. During World War II, consumer demand for goods and services were very high. In order to protect consumers from prices rising too high, price ceilings were set.

However, government intervention in the form of price controls meant that the price was not at the market equilibrium where quantity demanded met quantity supplied. This lower price led to a higher demand than supply, creating a shortage in the market. Consequently, goods had to be provided through a rationing system.

C. The reason for setting a price ceiling on agricultural products during the war is that the government was already using a lot of resources for war industries, which created a shortage of goods. Agricultural foods contain essential goods such as rice, wheat, fruits and vegetables. If prices of these rise too high due to high demand, civilians will not be able to afford them. Without consumption of these, civilian standard of living would drop dramatically.