1.

Price ceiling is a maximum price set below the equilibrium price so that the goods are more
affordable to people with low income.
An example of a price ceiling is that in recent years, Philippine president Rodrigo Duterte
ordered a price ceiling for pork and chicken in the capital region as food inflation has risen to
a double-digit level.
The government imposes price ceilings on goods and services such as rent, food, fuel, so that
prices are unable to adjust to their equilibrium level determined by demand and supply,
which are usually too high for people with lower income to purchase. By setting a price
ceiling below the equilibrium price, goods are now more affordable to people with low
income, leading to an increase in quantity demanded. (Law of demand) However, as the
price decreases supplying the good becomes relatively less profitable, therefore quantity
supplied will decrease. (Law of supply) Consequently, a shortage is resulted and could
possibly lead to rationing of the good, deteriorate in quality or give rise to a black market.

2.

From the diagram above we could see that by setting a price ceiling below the price
equilibrium at Pc the quantity supplied decrease from Qe to Qs. This is because as price
decreases supplying the good becomes relatively less profitable, therefore quantity supplied
will decrease. (Law of supply) Also, the quantity demanded increase from Qe to Qd due to
the decrease in price, following the law of demand. Therefore, a shortage is resulted as
there are excess demand. The prices are unable to adjust to their equilibrium level
determined by demand and supply, resulting in a market disequilibrium.
3. Shown in the diagram above, the price ceiling is at Pc, below the equilibrium price Pe. The
prices are now unable to adjust to their equilibrium level and a disequilibrium is created.
Due to this price ceiling, the maximum legal price is now at Pc. At Pc, the quantity supplied
decreases from Qe-Qs as supplying this good becomes less relatively profitable (law of
supply). In contrast, the quantity demanded increases from Qe-Qs as at Pc more consumers
are wiling and able to afford this good. Consequently, a shortage is created from Qd-Qs,
some consumers who are willing and able to purchase this good at given prices will be
unsatisfied. As the price mechanisms fail to function, non-price rationing methods are
introduced where price is no longer the determinant for which goods are distributed.
Examples of this include the distribution of coupons, limiting the amount of good one can
purchase in a given period.
The price ceiling also creates a welfare loss, where the consumer surplus changes from a+b
to a+c and the producer surplus changes from c+d+e to e. The total social surplus decreases
from a+b+c+d+e to a+c+e, where the area b+d are lost, representing the welfare loss. The
reason for this is due to the misallocation of resources, leading to the idea of allocative
inefficiency. As shown in the diagram above, Qs<Qe, meaning not enough resources are
used to produce this good, resulting in underproduction comparing to the social optimum
Qe. Therefore, welfare benefits are lost to the society because resources are not allocated
efficiently.

4. 4a) Price rationing refers to the allocation of limited amount of goods and services using
markets and prices. The price system will distribute the goods to only the consumers who
are willing and able to purchase at a various price. The non-price rationing method refers to
other rationing methods that doesn’t involve the price mechanism. The rationing of good
and services are now based on other attributes than money, examples of non-price rationing
include first in first serve
 4b) non-price rationing arises when a shortage is created. (such that resulted from a price
ceiling) Some consumers who are willing and able to purchase at given prices will go
unsatisfied as price mechanism no longer functions.

4c) some forms of non-price rationing include: waiting in line (first come first served
principle), distribution of coupons and favoritism.

4d) underground markets are a form of price rationing because price is the determinant for
which goods are rationed. The price mechanism will distribute the goods and services to only the
consumer who are willing and able to purchase at various prices above the legal maximum.

5. 5a)

5b)
 5c) The price ceiling changes the consumer surplus from a+b to a+c since the quantity
supplied decreases from Qe to Qs. The producer surplus changes from e+c+d to e as the
price decreases from Pe to Pc. In diagram a) the consumer surplus and producer surplus at
maximum (a+b+c+d+e) and allocative efficiency is achieved (no welfare loss) . However, in
diagram b), the price ceiling results in a disequilibrium social surplus is compromised
resulting in welfare loss. This is also shown on the b) where at Pc, Qs<Qd and MB>MC,
signifying the resulted shortage.

5d) At the new equilibrium, MC=MB showing that there is allocative efficiency where the
price and quantity are at equilibrium level determined by demand and supply. All of the
goods supplied are consumed by consumers meaning the resources are being used
efficiently. Any point above or below this equilibrium level means that there is inefficiency in
the allocation of resources. A price ceiling resulting in a shortage reveals that MB>MC,
indicating that society is not getting enough of the good and there would be allocative
inefficiency.

6. a) Rent Control
Consumers
When a price ceiling is imposed on rents, more consumers are willing and able to afford
the rent of a house, therefore the quantity demanded for housing increases. However,
due to the shortage (Qs<Qd) , some consumers who are able to pay the rent will not be
able to rent a house as they desire, meaning some people could still be homeless.
Non-price rationing could be induced and methods such as first in first serve could be
used. However, some consumers who are more able can look to rent houses at prices
above the price ceiling in black markets.

Producers
Due to the maximum legal rent being below the equilibrium level, renting out houses
becomes less relatively profitable, leading to decrease in revenue. House owners are
less willing and able to rent out their houses thus the quantity supplied of housing
decreases. Subsequently a shortage is created as the quantity demanded for housing is
greater than quantity supplied.
This could also cause the quality of rental houses to get worse as it is unprofitable for
house owners to maintain or renovate their rental units due to low rent and low
revenue. The shortage could also lead to a black market for housings where some house
owners are able to rent out their houses at prices above the legal maximum price.

b) Food price control

consumers

when a price ceiling is imposed on food prices, more consumers are now willing and able
to afford food, thus the quantity demanded for food increases. However due to the shortage
(Qs<Qd), some consumers who are willing and able to pay for food will not be satisfied. This
will introduce non price rationing methods such as the distribution of coupons to all
interested buyers and limit the amount of food they can purchase in a given period. Some
consumers who are more able could purchase food from black markets at prices above the
price ceiling.
Producers

Due to the maximum legal price being below the equilibrium level, supplying food becomes
less relatively profitable. Farmers are less willing and able to supply food, therefore the
quantity supplied decreases causing a shortage (Qs<Qd). The shortage could also lead to a
black market for food where some firms are able to sell food at prices above the legal
maximum price. There could be more unemployment in the agricultural sector as firms have
to reduce their costs. Firms might allocate their resources else where the profitability is
relatively higher. However, with food being a necessity, this could lead to significant
consequences such as starvation of some people.