Answer to Question #288902 in Microeconomics for Daniyal

Question

In 2021, a major ice storm hit the northern areas. The storm brought down power lines and trees, cutting electricity in many areas, making travel difficult, and slowing down repair crews. Heating homes became a major challenge. The storm created shortages of power generators. As a result, those products sold at prices much higher than normal. These high prices provoked cries of “price gouging” and calls on the government to impose price controls to prevent gouging. While no one likes to pay a higher price than normal for something, consider what would have happened with a price ceiling. The economic intuition is revealing.

Draw a diagram showing the market for generators with an equilibrium price at Rs.25,000. Now impose a price ceiling at Rs.20,000 per generator. What would be the impact of the price ceiling on the quantity demanded? On the quantity supplied? Who would benefit from the price ceiling and who would be harmed?

Answer 1

E-equilibrium price - 25000

P1=20000

When the price ceiling is below the equilibrium market price, the quantity supplied by producers is below the equilibrium quantity, as regulated by the law of supply. But the quantity demanded by consumers is above the equilibrium quantity, since it is regulated by the law of demand. This leads to an excess of the amount consumed over the amount supplied, which creates a shortage in the market.