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Supply and Demand
Production, Process, and Costs
Organization of a Firm
Economics of Information
Government in the Marketplace
What is a price celing?
1. A price ceiling sets the maximum price that can be charged in a market. With an effective price ceiling the market price is forced to remain below the equilibrium price level. A price ceiling leads to a shortage of goods in the market. A shortage occurs because at the price ceiling level, quantity demanded exceeds that of quantity supplied. This lower price causes more consumers to demand the good while the lower price causes fewer producers to supply the good.
Where do we find examples of price ceilings in the real world?
2. There are many examples of price ceilings. A common example is government set rent control. In order to provide more affordable housing the government often sets a price ceiling on rents. The rationale behind this is to ensure for renters there will be affordable housing for those who cannot afford the current market price. A second example of price ceilings is usury laws. Usury laws prohibit the charging of excessive interest on loans. Essentially the law acts like a price ceiling because it sets the legal maximum interest rate that can be charged on loans. A final example of price ceilings is a historical one and it occurred in the 1970’s. The U.S. government set a price ceiling on gasoline to make it more affordable for consumers. Due to the increased demand for gasoline, consumers had to wait in long lines to get gas and often were unable to purchase gasoline due to the shortage that was caused by the price ceiling. Research on this event concluded that the true price of gas, which included both the cash paid and the time spent waiting in line, was often higher than if prices were not controlled at all. In reality it would have been in the government’s (and consumers) best interest to have left gas prices at the market equilibrium instead of the implementing the price ceiling.
Baye, Michael R. (2006).
Managerial Economics and Business Strategy
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Johnson, Paul. “Price Controls.”
A Glossary of Political Economy Terms.
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Lidderdale, Tancred. “Price Ceiling.”
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Rockoff, Hugh, "Price Controls".
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4. Quiz Questions
1. Price ceilings lead to what?
C. Market clearing
2. The market equilibrium price is $10. What effect will a price ceiling of $12 have on the
A. It will cause a surplus.
B. It will cause a shortage.
C. The market will clear.
D. It will have no effect.
3. True or false, when an effective price ceiling is in place there is no consumer or producer
surplus lost due to the ceiling?
4. The equilibrium price in a market is $100 and the equilibrium quantity is 60 units. A price
ceiling of $75 is put in place by the government. Under the price ceiling the number of units
supplied is 35 and the number of units demanded is 85. Which of the below outcomes is a
result of this price ceiling being implemented?
A. A surplus of 25 units
B. A surplus of 50 units
C. A shortage of 25 units
D. A shortage of 50 units.
5. Which of the following is not an example of a situation involving a price ceiling?
A. Gasoline prices in the 1970's
B. Minimum wage
C. Housing in New York City
D. Proposed restrictions on ATM fees
6. True or false, when an effective price ceiling is in place, producers supply less of the good
compared to if the price ceiling was not in place?
7. The equalibrium price in a market is $30 and the equalibrium quantity is 42 units. A price
ceiling of $35 is put in place by the government. Under the price celing the number of units
supplied is 27 and the number of units demanded is 57. Which of the below outcomes is a
result of this price ceiling?
A. A surplus of 15 units
B. A surplus of 30 units
C. A shortage of 15 units
D. A shortage of 30 units
E. This is not an effective price ceiling
8. True or false, a price ceiling has a positive impact on the market due to the fact that it
legally sets a price lower than the market equalibrium price?
1. A – Price ceilings lead to an increase in demand and a decrease in supply which causes a
shortage of goods.
2. D – In order to be effective, a price ceiling must be set below the market equilibrium price.
3. B – This is false because the market is not clearing and is not operating at equilibrium so
there is both lost consumer and producer surplus.
4. D – First, an effective price ceiling leads to a shortage. Second, to find out how great the
shortage is, you subtract the new demand from the new supply.
5. B - Minimum wage is an example of a price floor, not a price ceiling.
6. A - This is true since the lower market price encourages fewer producers to supply the good.
7. E - This is not an effective price ceiling because the price ceiling of $35 is above the market
equalibrium price of $30. A price ceiling is only effective if it is set below the market
8. B - This is false since an effective price ceiling leads to lost consumer and producer surplus.
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