Limit beyond which a
cost will not be allowed to rise.
Price floors and price ceilings are both
examples of price controls. Price controls are set by the
government for a variety of reasons. Typically, price controls won't go into effect unless there is an
emergency or some other reason for the government to step in and tip the hand of the
free market.
Price Ceiling
Price ceilings are price controls put in place by the government when they believe a good or service is being sold for too high of a price.
They often result in localized
supply shortages if the ceiling is set too low. They
drive up
demand because, by definition, they make a good or service cheaper than the
market would have otherwise set the
rate at. A price ceiling cannot alter the
supply curve in a positive way, it always creates shortages, although sometimes supply is
elastic enough to
absorb them.
Price Floor
Price floors are price controls put in place by the government when a good or service is selling for too low of a price. Price floors can cause demand shortages, and excess supply. They drive down demand by raising prices higher than they would normally be set by the producer. This has the effect of subsidizing the producer and increasing their incentive to make a particular good or deliver a particular service, but it doesn't alter the demand curve positively.