Question

Draw a supply and demand graph. Show the effects of a forest fire on the market for lumber. Suppose the government then mandates a price ceiling at the original price, what will happen to the quantities of this good in the market?

Answer 1

From the above demand and supply graph, we find out that due to forest fire, the supply of timber decreases. The supply curve thus shifts to the left.

The equilibrium quantity in the market changes from $Q_E$ to $Q_0$ . The equilibrium price shifts from $P_E$ to $P_0$ . The demand will reduce due to increase in price.

If the government mandates a price ceiling at the original price, this means that the original level of demand will be restored. The available quantities in the market will not be sufficient to cater for the demand in the market. There will be a deficit.