Short Answer 
A price floor is a minimum price set above equilibrium to prevent goods from being sold too cheaply, resulting in surpluses; while a price ceiling is a maximum price set below equilibrium that creates shortages by keeping costs low. Price ceilings benefit consumers with lower prices, whereas price floors support producers by stabilizing their income.
Step 1: Understanding Price Floors
A price floor is a regulatory minimum price preventing goods or services from being sold below a certain level. Effective price floors are set above the equilibrium price, leading to a surplus due to excess supply over demand. For example, minimum wage laws ensure that labor costs do not drop too low, benefitting producers.
- Effective price floors are above equilibrium.
- Ineffective price floors are too high.
Step 2: Grasping Price Ceilings
A price ceiling is a maximum allowable price that keeps the cost of goods and services from rising too high. Effective price ceilings are set below the equilibrium price, creating a shortage where demand exceeds supply. This regulation is often seen in instances like rent control, which aims to keep housing affordable for consumers.
- Effective price ceilings are below equilibrium.
- Ineffective price ceilings are too low.
Step 3: Impact on Consumers and Producers
The ramifications of price floors and ceilings significantly affect both consumers and producers. Price ceilings generally assist consumers by lowering prices and making goods affordable, while price floors serve to support producers by stabilizing income levels. Recognizing these effects helps navigate economic policies effectively.
- Price ceilings help consumers by lowering prices.
- Effective price floors support producers by preventing low prices.