Question

What is the effect of price ceiling on equilibrium price and output?

Answer 1

When a price ceiling is imposed below the equilibrium price, the price of the commodity is not allowed to rise to the market equilibrium level. At this lower price, the quantity demanded exceeds the quantity supplied, resulting in excess demand or a shortage in the market. For example, if the equilibrium price of wheat is ₹ 50 per kg and the government sets a ceiling at ₹ 30, consumers will demand more wheat because of the lower price, but producers will supply less due to reduced profit margins. This leads to a situation where not everyone who wants to buy the good at the ceiling price can get it, causing long queues, black marketing, and rationing. Thus, while the intention of the price ceiling is to make goods affordable, it often leads to shortages and inefficiencies in the market.