Answer to Question #234653 in Microeconomics for the one

Question

in a command economy, authorities impose a price cap on canned fanta. show the effect in the canned fanta market

Answer 1

Answer

In case the price cap goes below the equilibrium point(Pc), the supply of the canned Fanta will go down.

Customers will not get enough of canned Fanta that they require. This means that the quantity of the canned Fanta in the market will be less by

Q(d) - Q(s)

PC is the price cap which is a horizontal line below the equilibrium.

P* is the quantity demanded.

Q(d) is the amount at which the price cap and the demand curve intersect.

Q(s) Quantity supplied is where the price cap and supply curve intersect.

Looking at the diagram below, it's clear that Q(d) is greater than Q(s). This means that, there is more demand of supply in the market but the supply doesn't meet the demand- there is shortage in canned Fanta supply.