Question

Select the correct answer. A price ceiling will usually shift: a. demand b. supply c. both d. neither

Short answer

A price ceiling does not directly shift either the demand or supply curves. However, it affects the market equilibrium, which might lead to shortages due to a lower price cap on the product or service. Thus, the correct answer is d. neither.

Step-by-step solution

Understanding Price Ceiling

A price ceiling is a government regulation that sets the maximum price that can be charged for a product or service. It is usually established to protect consumers from rapidly rising prices, especially for essential goods and services. When a price ceiling is set below the market equilibrium price, it creates a shortage as the quantity demanded exceeds the quantity supplied.

Analyzing Demand

With a price ceiling, the price of the product or service is capped at a certain level. This cap does not affect the preferences or desires of the consumers. Therefore, their willingness to buy the product or service remains the same, and the demand curve does not shift.

Analyzing Supply

When a price ceiling is imposed on the market, suppliers may not receive a price necessary to cover their costs of production. As a result, they may reduce the quantity supplied or decide not to produce the product at all. This can lead to a decrease in the quantity supplied in the market. However, the suppliers' cost of production does not change due to the price ceiling, and the supply curve remains unchanged as well.

Conclusion

A price ceiling does not directly shift either the demand or supply curves. However, it affects the market equilibrium, which might lead to shortages due to a lower price cap on the product or service. Based on the analysis, the correct answer is: d. neither