Explain the effects of 'maximum price ceiling' on the market for a good.
Explain the effects of 'maximum price ceiling' on the market for a good.
Maximum price ceiling refers to the maximum price of a commodity that sellers can charge from buyers. Often, the government fixes this price to be lower than the equilibrium market price so that the commodity remains within the reach of the poorer sections of the society. When the ceiling price is lower than the equilibrium price, there is likely to be excess demand in the market, leading to a shortage of the commodity. The figure illustrates this situation.
In Fig. MDb, is the demand curve and MSb is the supply curve. E is the point of market equilibrium. OP is the equilibrium price and OQ is the equilibrium quantity. In the diagram, OP∗ is the maximum ceiling price fixed by the government. Here, demand expands from OQ to OQ2 while supply contracts from OQ to OQ1. Consequently, a gap emerges between market demand and market supply. It is a situation when Demand > Supply or a situation of excess demand which is equal to "ab" in the figure. This might lead to black marketing of the product.
Briefly, a maximum price ceiling may lead to - (i) excess demand and (ii) black marketing, and the government may have to resort to rationing of the product.
Maximum price ceiling refers to the maximum price of a commodity that sellers can charge from buyers. Often, the government fixes this price to be lower than the equilibrium market price so that the commodity remains within the reach of the poorer sections of the society. When the ceiling price is lower than the equilibrium price, there is likely to be excess demand in the market, leading to a shortage of the commodity. The figure illustrates this situation.
In Fig. MDb, is the demand curve and MSb is the supply curve. E is the point of market equilibrium. OP is the equilibrium price and OQ is the equilibrium quantity. In the diagram, OP∗ is the maximum ceiling price fixed by the government. Here, demand expands from OQ to OQ2 while supply contracts from OQ to OQ1. Consequently, a gap emerges between market demand and market supply. It is a situation when Demand > Supply or a situation of excess demand which is equal to "ab" in the figure. This might lead to black marketing of the product.
Briefly, a maximum price ceiling may lead to - (i) excess demand and (ii) black marketing, and the government may have to resort to rationing of the product.
