Chapter 8, Problem 2FRQ

To determine

The question requires us to draw a graph representing an effective price ceiling on rent in the housing market and identify the quantity demanded, quantity supplied, and the size of the resulting shortage or surplus.

Explanation of Solution

A price ceiling less than the equilibrium price generates a persistent shortage of products in the market because at a price ceiling, consumers are willing to buy more products as they are getting them at a lower price, while the producers are willing to supply less as they are getting a lower price for their product. So, the quantity demanded exceeds the quantity supply and results in a shortage of the product in a market.

The following graph represents the correctly labeled diagram with a price ceiling and its impact on the market:

  

Initially, the economy runs at point E where,

Equilibrium price = PE

Equilibrium quantity of housing = QE

When the government sets a price ceiling, the price of the product falls to PC, and at this lower price,

Quantity demanded in the market = Qd

Quantity supplied in the market = Qs

Since the quantity demanded exceeds the quantity supplied there is a shortage of product in the market.

Size of shortage = Qd − Qs.

The shortage of housing in the market represents the inefficiency due to a price ceiling in the economy.

Economics Concept Introduction

A price ceiling is a method used by the government to set the price of a product or service in the market. Purchasing or selling that product below that price would be a punishable act. The government usually sets the price ceiling below the equilibrium price to safeguard the interest of some consumers.