Question

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

Short answer

When a price ceiling is set below the equilibrium level, it leads to an increase in the quantity demanded and a decrease in the quantity supplied, resulting in a market shortage. The demand curve shows the higher quantity demanded at the lower price, and the supply curve shows the lower quantity supplied at the price ceiling level. This imbalance between quantity demanded and quantity supplied creates a shortage, which could lead to consequences such as long waiting lines, lower-quality goods, and the emergence of a black market.

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 good or service. In this situation, the price ceiling is set below the equilibrium level. Equilibrium level is the point where the supply of a good matches the demand for that good, leading to a stable price and quantity exchanged. The equilibrium price and quantity occur where the supply curve and demand curve intersect.

Identifying the Effects of a Price Ceiling

When a price ceiling is set below the equilibrium price, it causes a shortage in the market because producers are not willing to supply the good at the lower price, while consumers demand more of the good due to its lower cost. The quantity supplied decreases as suppliers are less willing to produce goods at the artificially low price, while the quantity demanded increases as consumers are more willing to purchase goods at the lower price. This leads to an excess demand or a shortage in the market.

Analyzing the Demand Curve

Due to the lower price imposed by the price ceiling, the quantity demanded will increase along the demand curve. We can use the demand curve to determine the new quantity demanded by looking at the quantity demanded at the price ceiling level.

Analyzing the Supply Curve

Similarly, we can analyze the supply curve to determine the new quantity supplied. Since the price ceiling is below the equilibrium price, suppliers are less willing to provide the good at the lower price. We can use the supply curve to find the new quantity supplied by looking at the quantity supplied at the price ceiling level.

Comparing Quantity Demanded and Quantity Supplied

After finding the new quantities demanded and supplied, we can compare these quantities to determine the impact of the price ceiling on the market. The quantity demanded will be higher than the quantity supplied, indicating a shortage in the market. This shortage may lead to various consequences, such as long waiting lines, lower quality goods, and a black market where the good is sold illegally at a higher price. In conclusion, when a price ceiling is set below the equilibrium level, it results in an increase in quantity demanded and a decrease in quantity supplied, leading to a shortage in the market.