Principles of Microeconomics / Unit 2 MIC 0124 worked example, 60 to 90 seconds
Binding or Not
The idea
A control matters only if it forbids the equilibrium price. Compare the legal price with the equilibrium. A ceiling below equilibrium binds and causes a shortage; a ceiling above equilibrium is not binding and changes nothing, because the market price was already legal. A floor above equilibrium binds and causes a surplus; a floor below equilibrium is not binding. Then, if it binds, read the quantity demanded and supplied at the legal price and take the difference.
In practice
Worked example: a market for tutoring hours clears at twenty dollars, with eight hundred hours traded. A ceiling of twenty-five dollars is above the equilibrium, so it binds nothing and eight hundred hours are still traded at twenty. A ceiling of fifteen dollars binds: at fifteen, students want one thousand hours and tutors offer six hundred, a shortage of four hundred. A floor of twenty-five dollars binds the other way: tutors offer one thousand hours and students want six hundred, a surplus of four hundred.
Where people slip
The direction is the whole test. Students often reason that a ceiling always causes a shortage, and then report a shortage for a ceiling set above equilibrium. Ask first whether the equilibrium price is legal. If it is, the control is a dead letter, and the quantity traded is the equilibrium quantity.
Your place on the trail
Every lesson rests on earlier ones and opens later ones. Tap any to jump.
Something wrong in this lesson? Flag it