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 imbalance. This imbalance results in a shortage of the good or service, as the demand at the imposed price exceeds the willingness or ability of producers to supply it.

Step-by-step solution

1. Understanding Price Ceiling and Equilibrium Level

A price ceiling is a government-imposed limit on the highest price that can be charged for a good or service in the market. The equilibrium level is the point at which the quantity demanded by consumers equals the quantity supplied by producers.

2. Identifying the Effect of Price Ceiling Below the Equilibrium Level on Quantity Demanded and Quantity Supplied

When a price ceiling is set below the equilibrium level, the price for the good or service becomes lower than its natural (market) price. As a result, the quantity demanded will increase, and the quantity supplied will decrease, leading to an imbalance in the market.

3. Graphical Representation of the Price Ceiling Effect

To visualize the effect of the price ceiling below the equilibrium level, we can use a supply and demand graph. The x-axis represents the quantity, and the y-axis represents the price. - Draw the demand curve (D) from the top-left corner to the bottom-right corner. - Draw the supply curve (S) from the bottom-left corner to the top-right corner. - The point where both curves intersect is the equilibrium point (E), which represents the equilibrium price and quantity. - Mark the price ceiling (PC) on the y-axis below the equilibrium price level. - Draw a horizontal line across from the price ceiling to the demand curve, marking the quantity demanded (QD) at the price ceiling. - Draw another horizontal line from the price ceiling to the supply curve, marking the quantity supplied (QS) at the price ceiling.

4. Comparing the Quantity Demanded and Quantity Supplied Under the Price Ceiling

After completing the graph, we can see that the imposition of a price ceiling below the equilibrium level has led to an increase in the quantity demanded (QD) and a decrease in the quantity supplied (QS). This situation leads to a shortage of good or service in the market due to the gap between the quantity demanded and quantity supplied.

5. Concluding the Effect of Price Ceiling Below the Equilibrium Level

In conclusion, a price ceiling set below the equilibrium level negatively impacts the market equilibrium by increasing the quantity demanded and decreasing the quantity supplied. Such a policy can lead to a shortage of goods, as there is a larger demand for the good or service than the producers are willing or able to supply at the imposed price.