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Chapter 3: Q7. (page 78)

What is the effect of a price ceiling on the quantity demanded of the product? What is the effect of a price ceiling on the quantity supplied? Why exactly does a price ceiling cause a shortage?

Short Answer

Expert verified

A price ceiling causes demand to rise and supply to fall which results in a scarcity.

Step by step solution

01

Step 1. What is price ceiling?

A price ceiling refers to a price limitation, or limit, placed by the government or a group on the amount that can be charged for a product, commodity, or service.

02

Step 2. What effect does a price ceiling have on the product's quantity demanded and quantity supplied? What causes a shortage when a price ceiling is imposed?

A price ceiling is the most a producer can charge for a product or service. This is frequently required by the government to ensure that consumers can afford the goods and services in question.

A price ceiling (below the equilibrium price) causes demand to rise and supply to fall. A price ceiling causes a scarcity in this way.

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Most popular questions from this chapter

Many changes are affecting the market for oil. Predict how each of the following events will affect the equilibrium price and quantity in the market for oil. In each case, state how the event will affect the supply and demand diagram. Create a sketch of the diagram if necessary.

a. Cars are becoming more fuel efficient, and therefore get more miles to the gallon.

b. The winter is exceptionally cold.

c. A major discovery of new oil is made off the coast of Norway.

d. The economies of some major oil-using nations, like Japan, slow down.

e. A war in the Middle East disrupts oil-pumping schedules.

f. Landlords install additional insulation in buildings.

g. The price of solar energy falls dramatically.

h. Chemical companies invent a new, popular kind of plastic made from oil

Review Figure 3.4. Suppose the government decided that, since gasoline is a necessity, its price should be legally capped at $1.30 per gallon. What do you anticipate would be the outcome in the gasoline market?

What determines the level of prices in a market?

What would be the impact of imposing a price floor below the equilibrium price?

Table 19. 5 illustrates the market's demand and supply for cheddar cheese. Graph the data and find the equilibrium. Next, create a table showing the change in quantity demanded or quantity supplied, and a graph of the new equilibrium, in each of the following situations:

a. The price of milk, a key input for cheese production, rises, so that the supply decreases by 80 pounds at every price.

b. A new study says that eating cheese is good for your health, so that demand increases by 20% at every price.
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