ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -The ceiling price is binding and causes the equilibrium quantity to change – quantity demanded increases while quantity supplied decreases. It causes a quantity shortage of the amount Qd – Qs. In addition, a deadweight loss is created from the price ceiling.

Detailed explanation-2: -Price ceilings are enacted in an attempt to keep prices low for those who demand the product-be it housing, prescription drugs, or auto insurance. But when the market price is not allowed to rise to the equilibrium level, quantity demanded exceeds quantity supplied, and thus a shortage occurs.

Detailed explanation-3: -Price ceilings prevent a price from rising above a certain level. When a price ceiling is set below the equilibrium price, quantity demanded will exceed quantity supplied, and excess demand or shortages will result.

Detailed explanation-4: -Calculating the shortage. The shortage can be calculated as follows. Set the price ceiling price equal to the demand equation and equal to the supply equation and solve for Qd and Qs respectively. Subtracting Qs from Qd, we have a shortage of 4.75 units.

Detailed explanation-5: -A binding price ceiling always results in a shortage. Why? Because if a price ceiling is binding, the price will be below the market equilibrium price. Therefore, the quantity demanded is higher than it would be at equilibrium, but the quantity supplied is lower than it would be at equilibrium.