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Chapter 4: Q. 4.4 (page 75)

Explain the effects of price ceilings

Short Answer

Expert verified

Imposing a maximum price below the equilibrium leads to shortages.

Step by step solution

01

Step1. Introduction

Price ceiling is a method of price control where the government introduces a maximum price at which the exchange of that particular good can occur. This price is below the market equilibrium price.

02

Step2. Explanation

When such price which is below the market equilibrium is imposed, it implies that suppliers will supply less than the equilibrium quantity and consumers will demand more than the equilibrium quantity. This leads to shortage or also known as the situation of excess demand in the market.

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Most popular questions from this chapter

Why do you think that economists seek to study prices measured in terms of dollars per unit as measured, say, by weight or by volume rather than by prices per package or per container? Explain your reasoning.

A city has decided to impose rent controls,and it

has established a rent ceiling below the previous

equilibrium rental rate for offices throughout

the city. How will the quantity of offices leased

by building, owners change?

Why do you suppose that the Venezuelan government has begun to provide individuals with coupons giving them the right to purchase only strictly limited quantities of flour, milk, and toilet paper?

Suppose that in Figure 4-4, the government raises

the floor price of milk above the displayed

\(0.10-per-pound floor price, to \)0.12 per pound.

Will the excess quantity of milk supplied increase

or decrease as a consequence?

Consider Figure 4-1.The current demand and

supply curves areD,and S₁,at which the equilib

rium price and quantity are P₁ and Q₁.If there isa

decrease in the price of an item that consumers

regard asasubstitute for this good,which curve

shifts,and in which direction does it shift?What

happens to the market clearing price and to the

equilibrium quantity?
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