Question

You work for a firm that is currently selling a generic allergy medication. Recently there was a new price control set in place which is currently slightly higher than the current market price. What events could occur which would cause the price ceiling to become binding? Give an example of a decision your company can make to get the equilibrium price back under the price ceiling.

Answer 1

Something that can turn the price ceiling from non binding to binding is a decrease in the supply. If the current market price is less than the ceiling price, it is obvious that this ceiling price is not binding because sellers are already selling the product at a lower price and the maximum ceiling limit is not yet reached

If the supply is decreased then the supply curve will shift to the left and this will bring a new equilibrium price which will be higher than the previous equilibrium price as well as the price ceiling. If the new equilibrium price is greater than the price ceiling then the price ceiling will be binding because now the maximum limit is reached below the market price.

Your company can increase the supply of the product. It will reverse the previous decrease in the market supply so that the supply curve will now shift to the right, reaching original equilibrium price which was lower than the ceiling price. Therefore by increasing the supply of your product you can get the equilibrium price back under the ceiling price.