Principles of Macroeconomics / Unit 2 MAC 0122 worked example, 60 to 90 seconds
Binding or Not
The idea
To decide whether a control matters, compare it with the equilibrium price and remember which direction each kind blocks. A ceiling forbids prices above it, so it binds only when it sits below equilibrium, and then it produces a shortage. A floor forbids prices below it, so it binds only when it sits above equilibrium, and then it produces a surplus. A non-binding control leaves price and quantity exactly where the market put them.
In practice
Worked example: equilibrium is seven dollars. A ceiling of five dollars binds, and at five buyers want ninety while sellers offer thirty, a shortage of sixty. A ceiling of nine dollars does nothing. A floor of nine dollars binds, and at nine buyers want forty while sellers offer eighty, a surplus of forty. A floor of five dollars does nothing.
Where people slip
A surplus is the signature of a binding floor and a shortage of a binding ceiling. If a question reports a surplus, look for a floor set above equilibrium, and do not be drawn to the ceiling answers.
Your place on the trail
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