Question

What is meant by determination of price ceiling?

Hint:

Price ceilings can lead to shortages if set below the equilibrium price, as they limit how much a seller can charge.

Answer 1

Step 1: Defining Price Ceiling:
A price ceiling is a legally imposed maximum price that can be charged for a good or service. Price ceilings are typically set by governments to protect consumers from prices that are deemed to be too high, ensuring affordability of essential goods and services such as food, rent, and healthcare.
Step 2: Impact of Price Ceiling on the Market:
When a price ceiling is set below the equilibrium price (the price at which supply equals demand), it creates a shortage in the market. This is because at the lower price, the quantity demanded exceeds the quantity supplied, resulting in consumers being unable to purchase the product in sufficient quantities.
For example, if the government imposes a price ceiling on rent in an area with high demand, landlords may be unwilling to rent out properties at the lower price, leading to a shortage of rental units.
Step 3: Determining the Price Ceiling:
To determine a price ceiling, governments usually consider the equilibrium price in the market and set the maximum price slightly below it. However, the price ceiling only works effectively if it is below the equilibrium price. If set above the equilibrium price, it has no effect because the market will naturally set the price below the ceiling.
Step 4: Final Conclusion:
A price ceiling is a regulation that prevents the price of a good or service from rising above a certain level, typically to ensure that the product remains affordable. However, if the ceiling is set too low, it can lead to market shortages.