Economics – The allocation of resources - Price changes | e-Consult
The allocation of resources - Price changes (1 questions)
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A price ceiling is a legal maximum price that can be charged for a good or service. The law of demand and supply explains the consequences of such a policy.
- Quantity Demanded: At a lower price, the quantity demanded will increase. This is because consumers are willing and able to buy more of the good.
- Quantity Supplied: At a lower price, producers will be less willing to supply the good. This is because the price is less profitable, and some producers may exit the market.
- Shortage: The price ceiling creates a shortage because the quantity demanded exceeds the quantity supplied.
Cell Explanation Quantity Demanded Increases because the price is lower. Quantity Supplied Decreases because producers are less willing to supply at a lower price. Result Creates a shortage of the good. - Consequences for Consumers: Consumers benefit from the lower price, but they may face:
- Long Queues: Due to the shortage, consumers may have to queue for long periods to obtain the good.
- Rationing: The government may implement rationing schemes to ensure that the good is distributed fairly.
- Black Markets: A black market may emerge, where the good is sold at a higher price than the price ceiling.
In summary: A price ceiling leads to a shortage of the good, benefiting consumers in the short term but potentially creating negative consequences such as long queues, rationing, and black markets. The law of demand and supply explains this outcome.