Chapter 3: Problem 8

Does a price ceiling change the equilibrium price?

Short Answer

Expert verified

In conclusion, a price ceiling can change the equilibrium price if it is set below the original free market equilibrium price. In such a case, the price ceiling becomes the new market price, leading to an increase in quantity demanded by consumers and a decrease in quantity supplied by producers, ultimately resulting in market disequilibrium and a shortage of the product.

Step by step solution

Understand the concept of equilibrium price

In a free market, the equilibrium price is determined by the intersection of the supply and demand curves. At this point, the quantity demanded by consumers equals the quantity supplied by producers. This is the market clearing price, where there is no surplus or shortage of goods.

Introduce the concept of a price ceiling

A price ceiling is a government-imposed limit on the maximum price that can be charged for a good or service. The price ceiling is typically set below the free market equilibrium price to make the product more affordable for consumers.

Analyze the effect of a price ceiling on supply and demand

When a price ceiling is imposed below the equilibrium price, it creates a situation where the quantity demanded by consumers increases, as they are now able to afford the good at the lower price. However, producers may be less willing to supply the product at the lower price, leading to a decrease in the quantity supplied.

Discuss the potential for market disequilibrium

If the price ceiling is set below the equilibrium price, it can lead to a market disequilibrium, where the quantity demanded exceeds the quantity supplied. This creates a shortage of the product, as consumers are unable to obtain the desired quantity at the lower price. In this case, the market forces are no longer setting the equilibrium price, and the imposed price ceiling becomes the new market price.

Conclusion

A price ceiling can indeed change the equilibrium price if it is imposed below the original free market equilibrium price. In this case, the price ceiling becomes the new market price, and it can lead to a market disequilibrium characterized by a shortage of the product.