Price Ceiling - Meaning and its Graphical Representation

Price ceiling means the maximum price of a commodity set by the Government that sellers can charge from the buyers. Generally, this price is lower than the equilibrium price to make the products affordable to poor sections of society.

Illustration:

Suppose, the concerned product, here is essential drugs. There is a large number of buyers and sellers in the market. Therefore, the market concerned is perfect competition. Accordingly, the prices of these drugs are determined by the demand and supply forces in the market. Therefore, at average prices of Rs.1,000, the quantity is 200 Units.

It is assumed that the prices of essential drugs in the market are very high in the market. Thus, the poor section of society cannot afford to buy. Considering this fact, the government fixes the price ceiling at Rs750. It is lower than the equilibrium price. Consequently, the supply and demand get affected. The demand increases to 250 units and supply decline to 150 units, As a result, there would be a gap emerged between demand and supply. In other words, it creates a situation of excess demand i.e. Demand >Supply. Here, excess demand is 100 units (250-150 units).

Graphical Representation:

In fig, X-axis shows the quantity of drugs and Y-axis shows the prices.DD and SS are the demand and supply curves of drugs in the market. And, The point E is showing the initial equilibrium point with the equilibrium price of Rs.1,000 and Equilibrium quantity of 200 units. Considering the unaffordability of weaker section, the govt imposed a price ceiling of Rs.750 on the commodity. As a result, the demand for drugs extends to 250 units and supply contracts to 150 units. In other words, it creates a situation of excess demand i.e. Demand >Supply. Here, excess demand is AB = 100 units (250-150 units). 

The price at quantity demanded of 250 units is Rs.750. In contrast, The price at the quantity supplied of 150 units is Rs.1,250. Consequently, the deadweight loss is created i.e. ACE triangle. 

Implications of Price Ceiling:

Deadweight loss:

When the government imposed it on the prices of the commodities, the demand and supply forces get affected. With its implication, there would be excess demand and a shortage of supply in the market. It means that buyers are demanding goods at low prices in the market. On the other hand, the sellers are unwilling to sell their products at low prices.  As a result, the deadweight loss is created- an ineffective outcome. It is a term that shows the economic deficiency caused by an inefficient allocation of resources that disturbs the equilibrium in the market and contributes to making it efficient.

Rationing:

Due to excess demand, people fail to buy drugs to the extent they buy. Accordingly, a situation of partial hunger may continue to exist. Thus, This problem is solved by rationing. It means each person from a weaker section is allocated a fixed quota of bajra at the ceiling price. as a result, everybody gets a fair amount of commodity. And, the problem of hunger and the problem of hunger is solved.

Black Marketing:

Due to rationing, the rationed commodities are sold in the black market rather than delivering to the poor people. Black marketing defeats the purpose of a price ceiling. Whereas the price ceiling is imposed to ensure the availability of the commodity at a reasonable price to the weaker section. But. black marketing reduces the actual availability of this section. In addition, This marketing leads to the problem of scarcity and keeps the poorest of the poor in a state of deprivation. 

If the price ceiling is implemented incorrectly, the govt must improve its distribution system. The govt must bring a system that ensures the supply of goods to the poorer.

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References:

Introductory Microeconomics – Class 11 – CBSE (2020-21)