Question

Illustrate price ceiling with the help of a example.

Hint:

A price ceiling below the equilibrium price creates a shortage because the quantity demanded exceeds the quantity supplied at that price.

Answer 1

Step 1: Define Price Ceiling.
A price ceiling is a legal maximum price that can be charged for a good or service, set by the government. It is typically imposed to make goods more affordable, especially for essential goods.
Step 2: Illustrate Price Ceiling Diagram.
In the diagram below, the price ceiling is represented by a horizontal line at price \( P_{\text{max}} \), which is below the equilibrium price \( P_{\text{eq}} \). When the price ceiling is set below the equilibrium price, it creates a situation where the quantity demanded exceeds the quantity supplied, leading to a shortage.
Step 3: Diagram Description.
In the diagram: - The vertical axis represents price, and the horizontal axis represents quantity. - The supply curve slopes upwards, and the demand curve slopes downwards. - The price ceiling is drawn below the equilibrium price, creating a situation where the quantity demanded exceeds the quantity supplied at that price.