A price ceiling is the maximum acceptable price determined by the government on various commodities. It is the upper limit beyond which the prices e not allowed to rise for certain essential commodities like rice, wheat, kerosene, etc. it is mainly done to protect the interests of the consumers. Generally, the price is fixed below the market determined equilibrium price.
The market is in equilibrium at point E where the market demand and market supply curve intersect with each other. The equilibrium price is P1, and the quantity is Q1 respectively. The government introduces a price ceiling at the price level P which is lower than the equilibrium price level. The consumers demand Q units of the commodity. But the market supply is only Q* units. This creates a situation of excess demand in the market corresponding to the price where the quantity demanded is higher than the total market supply. Thus, even though, the government was trying to control the rising prices, it would result in the future shortage of the commodities. Thus the number of commodities sold to the people would be limited. Also, since the whole process is controlled by the government, the sales would be carried out through government authorised shops. This shortage can have two main implications:
• Each consumer would be given only certain pre-determined units of the commodities through government authorised shops. The total consumption would be fixed in the market even though some may be ready to pay a higher price to get more units. Thus, this can cause dissatisfaction among consumers.
• All the consumers would not be satisfied with the quantity of the commodities that they receive. Some of them would be willing to pay a higher price for it. This will result in the formation of black markets and hoarding practices.
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