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Principles of Economics 2e

2nd Edition
Steven A. Greenlaw; David Shapiro
ISBN: 9781947172364

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BuyFindarrow_forward

Principles of Economics 2e

2nd Edition
Steven A. Greenlaw; David Shapiro
ISBN: 9781947172364
Textbook Problem

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?

To determine

Show the effect of a price ceiling on the quantity demanded and quantity supplied. Also, describe the situation in which price ceiling cause a shortage.

Explanation

The price ceiling is a price law which is used by the government for essential commodities like medicines or food products to set the maximum price level in the market. It sets a maximum price level in the market so that every buyer can easily buy the product in the market.

Consider the following situation in which equilibrium price is ‘P’ and quantity is ‘Q’. If the government sets the maximum price which is more than equilibrium price level i.e., ‘P’ say P-1, there is more supply as compared to demand, so in order to sell the products, suppliers reduces the price from P-1 so price starts falling. As price starts falling, demand starts rising and this process of rising demand and falling price will continue until the equilibrium price ‘P’ and equilibrium quantity ‘Q’ is achieved. Therefore, when maximum price laws are setting above the equilibrium price level, it is not binding...

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