Written by
Syeda Sadia Amber Jilani
Economist & Economic Analyst
Market Equilibrium:
Market Equilibrium means a state or condition in which the market forces, Demand and Supply of a given commodity or service are in balance.
As,
Price Ceilings;
Price Ceiling is a maximum price set by the government or an agency at which a commodity can be sold. A binding price ceiling is set below the equilibrium point for giving relief to the Buyers but it causes to create a shortage or an excess of demand in the market. Due to price ceilings, demand exceeds supply (Qd > Qs).
For example, if the government sets a specific price for milk such that no buyer should pay more than that price. This will increase the demand for milk. And while its supply will not increase that much. This will create a shortage in the market.
Price Floors;
Price Floor is a minimum price set by the government or an agency at which a commodity can be sold. A binding price Floor is set above the equilibrium point for giving relief to the sellers but it creates a surplus or an excess of Supply. Due to price Floors, Supply exceeds Demand (Qd < Qs).
For example, if the government sets a specific price for Rice such that no seller should sell rice at less than this price. It will increase the supply and decrease the demand for rice and create a surplus in the market.
Conclusion ;
When a price ceiling is set below the equilibrium price, excess demand or shortages will result. Due to this excess of demand the market price will go up. And at the end, the market will be moved to the equilibrium point or equilibrium price where the quantity demanded and the quantity supplied are equal.
As,
When a price floor is set above the equilibrium price, quantity supplied will exceed quantity demanded, and excess supply or surpluses will result. Due to this excess of supply , the price will go down. And at the end, the market will be moved to the equilibrium point or Equilibrium Price where is neither shortage nor surplus as shown in the diagram.
Summary ;
Price ceilings is set below the equilibrium price to prevent a price from rising above a certain level.
Price floors is set above the equilibrium price to prevent a price from falling below a certain level.
Equilibrium
Asalam O alikum. Thanks to explain this topic with detail.
ReplyDeleteExcellent. Madam you have a good knowledge about Economics
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