Question

A price ceiling will result in a shortage only if the ceiling price is _______ the equilibrium price. LO3.6 a. Less than. b. Equal to. c. Greater than. d. Louder than.

Short answer

A shortage occurs if the ceiling price is less than the equilibrium price.

Step-by-step solution

Understanding Price Ceiling

A price ceiling is a government-imposed limit on how high a price can be charged for a product. It is usually set below the equilibrium price to make essential goods affordable for consumers.

Analyzing the Equilibrium Price

The equilibrium price is the price at which the quantity of goods supplied equals the quantity of goods demanded. At this price, there is no shortage or surplus of the good.

Establishing Conditions for a Shortage

A shortage occurs when the quantity demanded exceeds the quantity supplied. This scenario happens when the price is set lower than the equilibrium price, as it encourages consumers to buy more while discouraging producers from supplying enough.

Identifying the Correct Condition for a Shortage

For a price ceiling to result in a shortage, it must be set below the equilibrium price. This reduces the price from its equilibrium, leading to higher demand and lower supply.

Conclusion

A shortage will only occur when the price ceiling is less than the equilibrium price because it disrupts the balance where supply meets demand, leading to higher demand and lower supply at the lower price.

Key concepts

Equilibrium Price

Imagine you're at a busy market where vendors and buyers constantly haggle to find that sweet spot, the point where everyone is satisfied. This point is the equilibrium price. It's a special price where the quantity of a good that consumers want to buy is exactly equal to the quantity that sellers are willing to sell. When the price of a product reaches this equilibrium, there are no leftovers on the shelves (surplus) and no customers leaving empty-handed (shortage).

Therefore, the market is perfectly balanced. It's like a seesaw that's flat because both sides are equally weighted. The forces of supply and demand have worked together to settle at this unique price point where everything evens out perfectly. This balance can be altered when external factors, such as government regulations, interfere.

Shortage

A shortage is like showing up to a fully booked restaurant without a reservation. You've got lots of hungry diners, but not enough tables to go around. In economic terms, a shortage occurs when there are more people wanting to buy goods than there are goods available for sale.

This often happens when prices are set lower than the equilibrium price. Why? Because low prices encourage more people to buy the product, just like how a sale draws shoppers into a store. At the same time, producers may not want to make or sell as much because they're getting less money per item. Thus, a shortage arises when demand shoots past supply, leaving some potential buyers unsatisfied. It's a classic case of demand bumping heads with limited supply.

Quantity Demanded vs. Quantity Supplied

Understanding the difference between quantity demanded and quantity supplied is key to making sense of market dynamics. Quantity demanded refers to how much of a product consumers are ready and willing to purchase at a given price. Picture how many ice creams you'd want to buy on a hot summer day if the price was ideal.

On the flip side, quantity supplied is all about how much of that ice cream vendors are willing to sell at the same price. It's as if they're asking, "How many cones can I sell profitably?" This dance between demand and supply shapes the market, guiding us to where prices stabilize at equilibrium. However, when prices are interfered with, like through a price ceiling, this relationship can become distorted. If demand greatly outpaces supply due to lower prices, a shortage is inevitable.

Government Regulation of Prices

Government intervention often plays a major role in markets, especially when it comes to essential goods. By setting a price ceiling, the government attempts to make life easier for consumers, ensuring they can afford basic necessities.

A price ceiling is essentially a cap on how high the price of a product can go. But for it to truly be impactful, it must be below the equilibrium price; otherwise, it wouldn't change consumers' access to the good. The intention is often noble—to prevent prices from spiraling beyond the reach of average consumers.

However, this benevolent move can sometimes backfire. If the ceiling is set too low, it can result in shortages, as demand exceeds supply. Producers might be unwilling or unable to provide enough goods at that lower price, leaving buyers in a lurch. So, while these regulations aim to protect consumers, they can lead to unintended challenges, underscoring the complexity of economic policies.