question_answer

What is maximum price ceiling? Explain its implications.

Or

Explain the chain effects, if the prevailing market price is below the equilibrium price.

Answer:

A price ceiling occurs when the government puts a legal on how high the price of the product can be. In order for the price ceiling to be effective, it must be set below the natural marker equilibrium. It is also known as maximum price .This maximum price is fixed below the equilibrium price for the welfare of poor and vulnerable sections of the society.

Implications of price ceiling:

(a) When prices are lowered below the equilibrium price, than the demand increases more as compared to available supply. This leads to the situation of excess demand.

(b) With price ceiling, all the necessity products come under the reach of poorer and vulnerable sections of the society.

(c) Due to price ceiling, there is the situation of more demand and less of supply, since there is less supply, goods are made available to people in a fixed quantity (quota), otherwise this at times lead to a problem of shortage.

Or

When the prevailing market price is below the equilibrium price, then there is a condition of excess demand. This excess demand increases the competition among the buyers and buyers tend to buy the output at higher prices which increases the market price. As the market price starts rising, demand contracts and supply expands. This market price tend to rise till the equilibrium is restored.

In the above fig, it is assumed that the market price \[{{P}_{s}}\] is below the equilibrium price\[{{p}_{e}}\]. According to demand curve, quantity demanded \[{{q}_{d}},\] quantity supplied \[{{q}_{s}},\] there emerges the situation of excess demand (\[{{q}_{d\,\,}}-\,{{q}_{s}}\]).

The excess demand pushes the price up from the \[O{{P}_{s}}\] price level. With rise in price, the quantity demanded contracts and quantity supplied expands. This process continues till the equilibrium gets established at point E at \[O{{P}_{e}}\] price level and \[O{{Q}_{e}}\] quantity.