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Economics Homework Three Answers - Student Twenty-One (view source)
Revision as of 15:42, September 24, 2009
, 15:42, September 24, 2009no edit summary
7. A "price ceiling" is a type of price control that sets the maximum price allowed by law for something (like a real ceiling). A "price floor" is a type of price control that sets a minimum price allowed by law for something (like a real floor). Does a price ceiling that is set below the equilibrium (free market) price cause a surplus or a shortage? Using the graph in this lecture, explain why a surplus or a shortage is created by a price ceiling.
7. A "price ceiling" is a type of price control that sets the maximum price allowed by law for something (like a real ceiling). A "price floor" is a type of price control that sets a minimum price allowed by law for something (like a real floor). Does a price ceiling that is set below the equilibrium (free market) price cause a surplus or a shortage? Using the graph in this lecture, explain why a surplus or a shortage is created by a price ceiling.
A price ceiling below the equilibrium causes a shortage, because the supply and demand curves are not allowed to meet at the free market price. When the price is unnaturally lowered, the demand increases. The supply, however, does not change. So there are more people who want to buy the product, but the same amount of people supplying the product, creating a shortage. If the price ceiling was removed, manufacturers would charge more for their good, lowering the demand. The free market does not work properly with government interference.