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 or supply curves themselves, but it affects the quantities demanded and supplied, creating a disequilibrium in the market. Therefore, the correct answer is (d) neither.

Step by step solution

Understanding Price Ceilings

A price ceiling is a government-imposed maximum price that can be charged for a product, set below the equilibrium price. This means that the price cannot go higher than this set point. Price ceilings are implemented to protect consumers from high prices, but can sometimes lead to shortages in the market if suppliers are not willing or able to supply the product at the ceiling price.

Price and Demand

Demand refers to the quantity of a product that consumers are willing and able to purchase at a given price. The law of demand states that, all else being equal, as the price of a product decreases, the quantity demanded will increase, and vice versa. When a price ceiling is established below the equilibrium price, the lower price might make the product more attractive to consumers, which could increase thedemand for the product.

Price and Supply

Supply refers to the quantity of a product that producers are willing and able to sell at a given price. The law of supply states that, all else being equal, as the price of a product increases, the quantity supplied will increase, and vice versa. If a price ceiling is set below the equilibrium price, it directly affects the suppliers as they are not allowed to charge a higher price for the product. The reduced price can discourage producers from supplying the product, thereby decreasing the supply.

Effect of Price Ceiling on Demand and Supply

As we learned, a price ceiling set below the equilibrium price can potentially increase demand (by making the product more affordable) and decrease supply (by limiting the maximum price suppliers can charge). With higher demand and lower supply, a shortage may occur, resulting in excess demand that cannot be satisfied by the available supply. When a price ceiling is imposed, it does not shift the demand or supply curves themselves. Instead, it causes a disequilibrium in the market, affecting the quantity demanded and quantity supplied rather than shifting the actual demand and supply curves.

Selecting the Correct Answer

Based on the analysis above, we can conclude that a price ceiling affects neither the demand nor the supply curves themselves. It creates a disequilibrium in the market by changing the quantities demanded and supplied. Thus, the correct answer is: d. neither