If the Price of a commodity is 1 dollar and this price is the equilibrium price. At this price, the quantity demanded & supplied is 100(KGs). If government sets the price ceiling of 10 dollars, What would be the effects on the market?

My curve for this question is: enter image description here

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    $\begingroup$ So now that you have drawn a nice graph, all you have to do is interpret it. Where do you encounter difficulty? $\endgroup$
    – Giskard
    Apr 26 '17 at 6:01
  • $\begingroup$ @denesp: As we know that when the price ceiling is set above the equilibrium, it is ineffective but the graph i've drawn shows the surplus of suppliers over buyers. So how can we call this ineffective ceiling.. in the graph, the ceiling above the equilibrium effects the market. $\endgroup$ Apr 26 '17 at 9:30

No there is no impact at all. A price ceiling of $10 means that the price cannot go above $10. Since the equilibrium price is already below $10 the creation of a price ceiling will not effect anything at all.

It is called an ineffective ceiling because it is precisely that, ineffective.

  • $\begingroup$ saint321: but as you can see in the graph that there is a surplus of suppliers over buyers. $10 price leads to higher supply and lower demand.so how you can call this ineffective or no effect of ceiling on the market? $\endgroup$ Apr 27 '17 at 7:16
  • $\begingroup$ @MohammadSiyab There is a surplus of suppliers over buyers if the price is above Pe. But the price won't be above Pe becayse Pe is the equilibrium price. $\endgroup$
    – Ubiquitous
    Apr 27 '17 at 17:31
  • $\begingroup$ my graph is correct? $\endgroup$ Apr 28 '17 at 4:06
  • $\begingroup$ No. I didn't really look at the graph the first time. The supply curve should be upward sloping and the demand curve should be downward sloping. You have them reversed. Furthermore, if you want to show what the quantity supplied would be at the price ceiling then you need to show the supply curve intersecting with the price which you don't. As it is the quantity supplied seems arbitrary. Here is a better example of an ineffective price celining graph: image.slidesharecdn.com/lec1-5fordesktop-090713040352-phpapp02/… $\endgroup$ Apr 28 '17 at 13:24
  • $\begingroup$ Unless this is the graph you were provided in which case this is a very strange economy indeed where suppliers supply more of their products for lower prices and consumers buy more product for higher prices. This violates the fundamental assumptions of economics. $\endgroup$ Apr 28 '17 at 13:27

No impact at all. Hence the term "non-binding".


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