Question

does a binding price ceiling cause a shortage or a surplus provide an example to support your answer

Answer 1

Goverment policies such as price ceilings reduces the equilibrium quantity and rasie the equilibrium price. With a binding price ceiling, the supply and demand model predicts an equiibrium with shortage.

Example : Suppose the demand curve is q^d=100-10p and the supply curve is q^s =10p . The goverment imposes price ceiling of p=3. Describe how it creates shortage .

Ans :The market Equilibrium is at q^d=q^s .

=> 100-10p=10p

=>100=20p

=>p=5

=>q^d=q^s =50

Clearly tht price ceiling p'=3 <5

q^d at p' = 70, but q^s at p' = 30

Since q^d >> q^s there is excess demand leading shortage in the market .