Answer to Question #231144 in Microeconomics for Rani A/P Ramasamy

Question

On 30^th March 2020, the Malaysian government for the first time impose a price ceiling of RM1.50 on face mask. Illustrate the price ceiling in the diagram that you have drawn in Question 1. Explain what problem(s) the government has caused by imposing the price ceiling

Answer 1

Problem(s) the government has caused by imposing the price ceiling

If firms get a lower price, there may be less incentive to supply the face masks because they fear making losses. This will lead to a shortage in supply because demand will exceed supply.

Imposing the price ceiling can lead to black markets as people try to overcome the shortage of face masks and pay well above the market price.

Imposing the price ceiling can lead to losses and a significant drop in quality because when prices are too low, producer revenue drops, and they have to find a way to cut down on cost. This is achieved through cutting down production or putting more inferior products out on the market.