Question

For a product with common price of 5, a price ceiling of 2 has beet set which is lower than the common price. Explain in details, the impact, advantages and disadvantages of the price ceiling to the market and the customers. Explain with a simple diagram.

Answer 1

Price Ceiling : Price Ceiling is a strategy used by the government to impose price limit on commodities. It is a limit set by the government inorder to protest the interest of the customers. It is a measure taken to protest customers from the exploitation of the suppliers. In price ceiling maximum price limit is set for the commodity, above which the supplier cannot increase the price. This measures is taken by the government during high inflation inorder to stabilise the economy and reduces the price for commodities. There is also an another measure used by the government which is known as Price Floors which is used in case of high deflation.

The impact of price ceiling in the maket and customers is that customers can get the high quantity of goods at a low price. In the short run it will impact the market in a great way and in the long run it not beneficial. When price ceiling is introduced in the market the maket price will be less than the equilibrium price which will increase the demand of the products and will cause shortage in the market. Governemnt bring in this startegy only during high inflation to protect the cunsumers. The quality of the products are usually compramised at such a situation. The market efficiency will be decreased and the overall economy growth will be affected.

Advantages of price ceiling to the customers and the suppliers : For supplies there won't be much of a benefit through price ceiling but the only thing they will get is that they can exploit the potential customers. But for the customers it will benefit them by allowing them to buy more products at a relatively less price. People with low income can live sufficiently with this strategy.

Disadvantages of price ceiling to the customers and suppliers : For suppliers it will decrease the amount of profit they make by selling the goods and services. It will force them to produce more as the demand is high but they might refuce that due to the lack of profit. They won't be able to capture the market share. For customers the quality of the products they get from the market will be very less because the supplier is not benefiting much from them. Choice / selection will be less.

Here I am attaching a diagram which shows a market with equilibrium price of $5 reduced to $2 due to price ceiling which is somewhat similar to the above asked question.