Price ceilings have several important effects: They create shortages, reductions in quality, wasteful lines and other search costs, a loss of gains from trade, and a misallocation of resources.

After reading this chapter, you should be able to explain all of these effects to your uncle. Also, to do well on the exam, you should be able to draw a diagram showing the price ceiling and correctly labeling the shortage. On the same diagram, can you locate the wasteful losses from waiting in line and the lost gains from trade? Review Figure 8.2 and Figure 8.3 if you are having trouble with these questions. You should also understand why a price ceiling reduces product quality and how price ceilings misallocate resources, not just in the market with the price ceiling but potentially throughout the economy.

Price floors create surpluses, a loss of gains from trade, wasteful increases in quality, and a misallocation of resources.

After reading this chapter, you should be able to explain all of these effects to your aunt. Can you show, using the tools of supply and demand, why a price floor creates a surplus, a deadweight loss, and a wasteful increase in quality? You should be able to label these areas on a diagram. You should also be able to explain how price floors cause resources to be misallocated.