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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

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?

In recent years, technological improvements have greatly reduced the costs of producing basic cell phones, and a number of new firms have entered the cell phone industry. At the same time, prices of substitutes for cell phones, such as smartphones and some tablet devices, have declined considerably. Construct a supply and demand diagram of the market for cell phones. Illustrate the impacts of these developments, and evaluate the effects on the market price and equilibrium quantity.

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?

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 government places a ceiling on the price of a medical drug below the equilibrium price.

a. Show why there is a shortage of the medical drug at the new ceiling price.

b. Suppose that a black market for the medical drug arises, with pharmaceutical firms secretly selling the drug at higher prices. Illustrate the black market for this medical drug, including the implicit supply schedule, the ceiling price, the black market supply and demand, and the highest feasible black market price.
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