What is a Price Ceiling?
The price ceiling is the maximum price the producer is allowed to charge by selling their goods and services.
Let’s understand this topic in detail.
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When do we place the maximum price ceiling?
To impose a price ceiling, the government usually intervenes only in the situation of shortages because if they are not controlled on time, it leads to high market prices of the goods.
The government imposed an upper limit on the price of goods and services. This is called a price ceiling or maximum price ceiling.
The price ceiling is generally imposed on necessities wheat, rice, sugar, house rent, etc.
It is fixed below the market-determined price and at the price ceiling, the quantity demanded exceeds the quantity supplied. This is known as excess demand.
Effects of a Price ceiling on market equilibrium
Let’s assume the market for wheat. The market demand curve is DD and the market supply curve is SS, which intersect each other.
Here equilibrium quantity is Q* and the equilibrium price is P. When the ceiling is imposed, price becomes lower at Pmax, the quantity demanded becomes Qd, and quantity supplied becomes Qs.
Hence there is excess demand which is equal to QdQs at the price ceiling. Though the intervention of the government was to protect the consumer it would end up creating shortages of wheat.
The Implications of the price ceiling
- Rationing – It is a technique adopted by the government to sell a minimum quota of the essential commodity at a price less than the equilibrium price to supply goods to the poor at a cheaper price.
- Black marketing – It means selling goods at a price higher than the maximum price fixed by the government.
You can read the related concepts:
- Perfect Competition
- Monopoly Market
- Monopolistic Market
- The price elasticity of supply
- The supply curve
- What is the production function?
- Terms related to production concept
- Law of diminishing returns to a factor
- Total cost, Total variable cost, and total fixed cost
- The relation between TC, TVC, and TFC
- Average total cost
- The demand curve
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