Suppose the government imposes a price ceiling that is lower than the equilibrium price. Discuss the effect, if any, on the price and quantity if the government later removes the price ceiling
What will be an ideal response?
If the price ceiling is lower than the equilibrium price, the price ceiling has an effect on the market. When the price ceiling is imposed, it increases the quantity demanded and decreases the quantity supplied, thereby creating a shortage of the good. When the government removes the price ceiling, the reverse effects occur. The price rises back to the equilibrium price. With the higher price, the quantity demanded decreases and the quantity supplied increases. The shortage is eliminated because the quantity produced equals the quantity consumed and both are equal to the equilibrium quantity.
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