A Price Ceiling

The government establishes a standard price for each commodity or service on the market in an effort to remedy market irregularities and consumer exploitation. Depending on the forces of supply and demand, the standard price may be greater or lower than the going rate. More crucially, the majority of wholesalers and suppliers stockpile items in expectation of future price increases, which results in a mismatch between supply and demand. The most common method the government employs to regulate market price levels is the price ceiling. Always set higher than the equilibrium price. A price ceiling is a control or a limit imposed by the government in managing how high the product might be charged in the market. Such conditions can occur during economic down time like during inflation and in a monopolistic market. As such, the government tries to protect her citizens from buying products and services at expensive costs. The research will discuss the technique of price ceiling using examples in the illustrations as follows.

Is price ceiling set above or below market price?

The price ceiling is set below the equilibrium price to help the consumers purchase goods at lower costs. That is why the reason why it is called the maximum legal price. Business people are not allowed to exploit or sell things expensively to the citizens with the aim of maximizing on their profits. Price ceiling normally creates shortages in the supply of the product in the market. This is because the price ceiling will below the equilibrium market price thus increasing the demand. On the other hand, there is less supply because of lower prices hence the quantity demanded become more than the quantity supplied (Demand and Supply_EconMovies#4, n.d). It is important to note that a reverse of price ceiling is floor pricing. A combination of the two work together in setting the economy at efficiency level but they cause significant losses to the business family.

Give an example of a price ceiling and discuss the advantages and disadvantages of the price ceiling as a type of government intervention

In the graph below, the intersection MB shows the marginal price the consumers are willing to pay, while the P* indicates the legal maximum price the government has set for the product for the same quantity Q* that the firm is willing and capable of producing. At the point P*, the quantity supplied is less than the quantity demanded thus causing the shortage. As usual, shortage in quantity causes scramble for the goods hence rise in prices. For instance, the recent rise in the prices of gas which, left the consumers seeking the government to introduce price ceiling on gas suppliers. The intervention led to the shortages of gas in the market because the producers were not willing to produce more gases at low prices. Did you see how bad the idea is? A similar condition occurred in the year 1970s that were characterized by the long queues at the petrol stations. See fig 1 above. Retrieved from http://economics.fundamentalfinance.com/price-ceiling.php

Fig. 1: A Graph showing the price ceiling example in Gas Industry.

When setting the price ceiling, the government must lay out plans on who will bear the drop in prices. This is so because suppliers would not be willing to produce more on low price levels.

Advantages of Price Ceilings

Price ceiling has many advantages in developing a more stable economy. First, the intervention helps to stop suppliers from participating in gouging, or selling their goods and outrageously higher prices because they have the capacity. It would become illegal for the supplier to sell a similar quatity, product, or goods above the maximum set price by the government. In addition, the price ceiling also benefits the citizens by keeping the cost of living low during the high inflation periods (Factors Affecting Supply, Khan Academy (n.d). Inflation is marked by the gradual trend in increase in prices of goods and services over a period. During the high inflationary times, the costs of goods and services tend to go up while the decline in the income levels. Therefore, the buyers’ purchasing power reduces as the price of one-dollar rises making it hard for most consumers afford their normal standard of living.

The government uses price ceiling to give the citizens from low-income consumers to afford basic goods and services in order to fulfill their needs. As the restrictions block the entrepreneurs from overcharging their clients of the services, the market remain with less but quality goods enough for the support of the populations. The producers need to supply below the market equilibrium and fall in the new set equilibrium price and quantity to avoid overstocking.

Disadvantages of Setting Price Ceiling

Despite the positive comments about the price ceiling intervention to the consumer, the policy also influences negatively in the market place. According to the law of supply, producers produce more of the products when their prices increase. In a similar context, a drop in the price levels due to price ceilings would discourage them from undertaking productions. Therefore, the supply of basic materials would reduce hence bringing a decline in the operations in the economy. The quality of the products may also reduce due to lying off qualified expensive staffs to cut costs of production. In the end, the producers might not be able to services their physical resources such as hiring high capacity and efficient machines. Consequently, the frims would record low returns and profits making them vulnerable to taxes. The government income through taxation would as well reduce.

The effect of raising museum art for the admission fees and subsequent decline in the total revenue

As a museum director, he should understand that the economics of demand and supply applies to all sectors of the economy. As it appears to be, any open market faces competition from other industry players. As such, the rise in the entrance fees makes the museum expensive to the tourist compared to the other museums. Therefore, the demond for entry declines. However, the supply of the arts is just constant since none is tied to the ability of the visitors to the museum.

Suppose that Billy buys two cups of coffee in a day no matter the price. What does this mean in terms of supply and demand equilibriums?

The condition of purchasing without considering the changes in the market prices is called blind buying. Billy is driven by the appetite of the goods not the cost of goods. According to the demand and supply principles, neither demand nor supply affects his ability to purchase. Therefore, the equilibrium quantity demanded would not change in all circumstance.

Determinants of demand and supply equilibrium in the sale of Orange juices

The main factors that affect the demand and supply of the goods and services include, the price, cost of production, quantity available. An increase in price in a certain brand of orange juice leads to the increase in sales of the other similar brands. The cost of production affects the pricing of the product too. Therefore, the equilibrium price and quantity will be determined by quanity and prices of all brands of orange juices available in the market.

Conclusion

In summary, the setting of price ceiling refers to the setting of legally maximum price where the firms should not sell above. The price cap helps reduce the effect of monopolies and exploitations of consumers in the country. As mentioned above, price ceiling is the most popular technique used by the government to control the price levels in the market (Law of Demand. Khan Academy (n.d). It is always set above the equilibrium price. A price ceiling is a control or a limit imposed by the government in managing how high the product might be charged in the market. The price ceiling is set below the equilibrium price to help the consumers purchase goods at lower costs. Despite the many advantages of price ceiling intervention the supply of basic materials would reduce hence bringing a decline in the operations in the economy. The quality of the products may also reduce due to lying off qualified expensive staffs to cut costs of production. Lastly, suplly and demand don affect blind purchasing.

References

Demand and Supply_EconMovies#4: Indiana Jones. (n.d). Retrieved 25/09/2017 from https://tinyurl.com/hs7jqsw

Factors Affecting Supply, Khan Academhy. (n.d). Retrieved 24/09/2017 from https://tinyurl.com/Iqorynz

Law of Demand. Khan Academy. (n.d). Retrieved 24/09/2017 from https://tinyurl.com/k2zr68r

Law of Supply, Khan Academy. (n.d). Retrieved24/09/2017 from https://tinyurl.com/Ixqe43