Price
Ceiling
Definition of Price
Ceiling
A Price Ceiling is a
government-imposed maximum price for a product.
Impact of Government
Imposed Price Ceiling that is above the equilibrium price
When a price ceiling
imposed by a government is higher than the market equilibrium price, the price
ceiling has no impact on the economy. It does not restrict supply nor encourage
demand. It says you cannot charge (or be charged) more than an amount that is
higher than is already being charged.
Graph A shows the
equilibrium price of $5 for a product determined by the intersection of the
supply and demand curves.
Equilibrium price is the
price at which the quantity demanded is equal to the quantity supplied.
Typically, market forces do not move to change either demand or supply at the
equilibrium price.
If a government mandated
price ceiling of $100 were imposed, nobody would notice, since the ceiling is
so far above the market price. If the price ceiling were $5.01 it wouldn’t have
an immediate effect, but the first time market forces change to increase the
equilibrium price, the ceiling would no longer be below below the market price,
and it’s impact would begin to be felt. [See section below on impact when price
ceiling is below equilibrium price.]
Impact of Government
Imposed Price Ceiling that is below the equilibrium price
A price ceiling can either
be above or below the equilibrium price, as shown by the dashed and solid lines
in Graph B.
The dashed line of Graph B
represents the government’s imposed maximum price (ceiling price) above the
market-determined equilibrium price, and has no measurable affect on the
product’s price. In this case, the market is unable to produce a price as high as
the ceiling price.
A different effect occurs
when the government’s imposed maximum price is below the market’s equilibrium
price, as shown by the solid line in Graph B. Suppliers can no longer charge
the price the market demands but are forced to meet the maximum price set by
the government’s price ceiling.
A low ceiling price can
drive suppliers out of the market (reducing the supplied resources), while the
lower price drives increased consumer demand. When the demand increases beyond
the ability to supply, shortages occur. This creates a rationing of the product
by the market. Some consumers could experience longer lines for the product or
no available products when they need or desire to purchase.
Sometimes governments
combine low price ceilings with government rationing programs that mandate how
the market will allocate the now inadequate supply of goods.
Price Ceiling compared
to a Price Floor
A Price Ceiling is a
government-imposed maximum price charged on a product. It differs from a price
floor in that a price ceiling artificially keeps prices from rising too high,
which in theory allows consumers to afford the product or service, but can
result in shortages and rationing. A price floor keeps prices from falling too
low, which can protect producers, but can generate excess supply and waste.
Source:
Thank God that Jesus' salvation has no price ceiling nor price floor. He gave us freely without any cost. But, still the demand remain low. What we need is only faith in Him and do like what He has taught us. Amen^^
ReplyDeleteCome and get it. There's no subtitute goods nor complementary goods. And there's no price ceiling nor price floor, because it will be given to everybody without any cost. The salvation is only by His mercy and all you need is only faith to Him and do like what He had taught us.
ReplyDeletePak Rully I want to ask for a concrete example of the government applying the price ceiling. Because as far as I know, it is very rare for the government to apply price ceiling. Besides apartment rent, what else is the example of price ceiling?
ReplyDelete