Question

1.) Use a supply and demand diagram to show the effects of a binding government price ceiling on beef. Label your diagram and explain. What effect will this policy have on the price of pork. explain.

Answer 1

Effects of a binding government price ceiling on beef is shown in the below graph:

Binding price ceiling is the legal maximum price at which consumers buy and sellers sell. It is below the equilibrium price. As there is price ceiling , then consumers demand more of beef , but the supply of beef is limited to Q1 at price P1. And therefore, other consumers are not able to purchase beef. Because of this , binding price creates shortage of beef because suppliers can't increase the price of beef. Shortage of beef is equal to Q2- Q1.

And beef and pork are substitutes. Therefore, as there is shoratge of beef , then consumers will shift their demand from beef to pork. This will shift the demand curve of pork to rightward. This increases the price of the pork.