Chapter 4: Problem 12

Select the correct answer. A price ceiling will usually shift: a. demand b. supply c. both d. neither

Short Answer

Expert verified

A price ceiling does not shift the demand curve or the supply curve, but it can result in a change in the quantity demanded and supplied. Therefore, the correct answer is: d. neither

Step by step solution

Define a Price Ceiling

A price ceiling is a government-imposed limit on the price that can be charged for a good or service in a market. In other words, it sets the maximum price that a seller can ask for a certain product. The reason for implementing a price ceiling is to protect consumers from high prices, especially in cases where the essential goods or services are involved.

Analyze the Effect of Price Ceiling on Demand

A price ceiling does not directly affect demand. It may indeed cause a change in the quantity demanded, but unless it changes consumers' preferences, income, or other factors affecting the demand curve, the demand curve itself remains constant. Thus, a price ceiling does not shift demand.

Analyze the Effect of Price Ceiling on Supply

A price ceiling affects only the suppliers. By imposing a maximum price, it might indirectly force the suppliers to modify their production volume. If the price ceiling is set below the market equilibrium level, it creates an excess demand for the good, as the suppliers do not find it profitable enough to supply at their full capacity. As a consequence, the quantity supplied decreases, which causes a movement along the supply curve. However, the price ceiling does not change the underlying cost structure, technology, or other factors affecting the supply curve, so it does not shift the supply curve.

Choose the Correct Option

Based on the analysis above, we can conclude that a price ceiling does not shift the demand curve or the supply curve, but it can result in a change in the quantity demanded and supplied. Therefore, the correct answer is: d. neither

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