Price ceiling

Question 1

Define price ceiling

Answer 1

• legally established max price
• firms permitted to sell at or below
• effective only when set below eqm price
• upper limit/price control

Question 2

Objectives of price ceiling

Answer 2

1. Keep prices of goods affordable ie. essential foodstuffs
2. Prevent exploitation of consumers
   - charging exorbitant prices during shortage
3. Restrict production of good, freeing some resources for other uses

Question 3

Example (Keeping essential goods affordable)

Answer 3

• Dec 2012
• Indonesian gov imposed price ceiling on 13 essential foodstuffs
• conjunction w Christmas hol

Question 4

Effects of price ceiling

Answer 4

• P falls to 0Pc
• quantity exchanged falls frm Q to Q1
• TR of firms falls
• shortage occurs, will persist as mkt prevented frm readjusting itself
• De: greater resultant shortage (vice versa for Di)
• shortage of gd may lead to black mkt

Question 5

Black mkt

Answer 5

• goods sold illegally at prices (above ceiling price)
• unsatisfied buyers willing to pay higher prices to get gd
• profits made by those who buy at controlled price, ltr sell at higher price

Question 6

Allocation methods (black mkt)

Answer 6

1. Gov rationing
2. First come first served
3. Seller’s preference
4. Random allocation

Question 7

Gov rationing (Allocation methods)

Answer 7

• distribute sufficient coupons
• to match available supply
• among population
• according to age, family income&size

Question 8

First come first served

Answer 8

• queue up to buy good
• long queues &waiting lists form
• latecomers cannot buy gd

Question 9

Sellers’ preferences

Answer 9

• sellers decide to whom they will sell the gd
• “sell under counter”/ sell at higher price
• close friends/associates
• “tie-in sales” sell to only those who buy frm them

Question 10

Random allocation (Allocation methods)

Answer 10

• gds distributed at random

- various individuals