Question

How does a price ceiling set below the equilibrium level affect quantity demanded and quantity supplied?

Short answer

A price ceiling set below the equilibrium level leads to an increase in quantity demanded and a decrease in quantity supplied, creating a market shortage. At the lower price imposed by the price ceiling, consumers demand a greater quantity of the good or service, while producers are willing to supply a smaller quantity. This imbalance results in excess demand and a shortage in the market.

Step-by-step solution

Define equilibrium, price ceiling, quantity demanded, and quantity supplied

Equilibrium is the point at which the quantity demanded and the quantity supplied are equal, and the market clears. A price ceiling is a government-imposed limit on how high a price can be charged for a product or service, which is set below the market equilibrium price. Quantity demanded refers to the amount of a good or service that consumers are willing and able to purchase at a given price, while quantity supplied refers to the amount of a good or service that producers are willing and able to offer at a given price.

Describe the market before the price ceiling is imposed

In a competitive market, the equilibrium price (P) and quantity (Q) are determined by the intersection of the supply and demand curves. At this point, consumers' willingness to buy matches producers' willingness to sell, and both quantity demanded and quantity supplied are equal.

Introduce the price ceiling below the equilibrium level

When a price ceiling is imposed below the equilibrium price, it effectively caps the price that can be charged for the good or service. This results in a new price (Pc), lower than the equilibrium price (P).

Analyze the effects of the price ceiling on quantity demanded and quantity supplied

At the new lower price (Pc), consumers will now demand a greater quantity (Qd) of the good or service, which is more than the original equilibrium quantity (Q). In contrast, producers will be willing to supply a lower quantity (Qs) at the price ceiling, which is less than the original equilibrium quantity (Q). Since the price ceiling is below the equilibrium level, there is an excess demand (Qd - Qs) for the good or service. In other words, the quantity demanded now exceeds the quantity supplied, creating a shortage in the market. To summarize: 1. Before the price ceiling: equilibrium price (P), equilibrium quantity (Q) 2. After the price ceiling: price ceiling (Pc), new quantity demanded (Qd), and new quantity supplied (Qs) 3. Resulting market imbalance: excess demand (Qd - Qs), or a shortage in the market.

Conclusion

A price ceiling set below the equilibrium level affects the quantity demanded and quantity supplied by creating a shortage in the market. Consumers demand a larger quantity of the good or service at the lower price, while producers are willing to supply a smaller quantity at that capped price. This imbalance results in excess demand and a shortage in the market.