Question

Explain Price Ceiling with the help of a diagram:

Answer 1

The price ceiling refers to the maximum price that a producer may charge. The government imposes such a ceiling when it determines that the equilibrium price is too high and out of reach for the average person. The government can set a maximum price that cannot be increased (price ceiling). This is a limit on how much a price can rise. In the case of necessities such as food and medicine, the government uses this option.

The need for such an action arises in case of "shortage".

1. The equilibrium price is shown in the diagram as OP. Assume the government imposes a price ceiling OP₂.
2. At this price, the supplier supplies OQ₁  and the consumer seeks OQ₂, resulting in a Q₁Q₂ scarcity.
3. If the government only puts a ceiling, it will lead to black marketing. It entails illegally charging a higher price than the government has set. If all of the merchants are dishonest, the price may reach OP₁.
4. Shortages or black marketing will put public pressure on the government to supply "RATIONING" via a "PUBLIC DISTRIBUTION SYSTEM" termed "RATION SHOPS."