Question

A price ceiling will result in a shortage only if the ceiling price is ____________ the equilibrium price.

a. less than

b. equal to

c. greater than

Short answer

Option (a): less than

Step-by-step solution

Meaning of price ceiling

A price ceiling puts a limit to the maximum price that can be charged by the sellers. It reduces the effect of high prices that seems unaffordable for many consumers. It can be binding depending on if the set price is below or above the equilibrium price.

Explanation on price ceiling creating shortages

If the price ceiling sets the price of a good below the market-determined price, the market will be unstable. At the set price, the consumers’ demand will exceed the supply by sellers. The movement toward the equilibrium point is restricted by the price ceiling. The sellers are unwilling to increase supply at such lower prices. Hence, the excess demand persists, and there is a shortage in the market.

In the diagram, the price ceiling is below the market equilibrium price ($\overline{P}<P$). At this point, the quantity demanded is more than the supplied amount ($Q_D-Q_S$), and hence, there is a shortage ($Q_D-{Q_S}_{}$).

For example, consider the following values of quantity demanded and quantity supplied at the price ceiling:

$$\begin{gathered} Q_D=400 \\ {Q}_S=200 \\ Q=300 \end{gathered}$$

localid="1642678108956" $$\begin{gathered} Shortage=Q_D-Q_S \\ =400-200 \\ =200 \end{gathered}$$

Thus, the shortage here equals 200.