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Free Market?
If the free market price is higher than the price floor, the policy has no immediate impact on the market. However, if the free market price is lower than the price ceiling, the market will be forced to change to accommodate the price ceiling. What type of changes might occur in a market‚s supply and demand equilibrium under these conditions?
Public Comments
- Actually, according to your question, having a market equilibrium price LOWER than a price CEILING will not affect prices or quantities. Price ceiling policies only affect markets when the price ceiling is lower than the equilibrium price, which is what I think you are asking. In the case of a price ceiling under a market price, several things will occur. First of all, consumers will react to the decreased price in accordance with their demand curve; naturally, the quantity demanded will increase (note: DEMAND does not increase when prices decrease, only quantity demanded, moving along the demand curve). More importantly, however, suppliers will react to the decreased price as per their supply curve: namely, they will produce less of it. Now we have a situation where quantity demanded has increased but quantity supplied has decreased (again note: no change in the S & D curves). We now have what we call a shortage: too much demand for too little supply. Interestingly enough, the market has a way of getting around external obstacles, either through the use of black market supply (some people might produce and supply the product for a higher price, probably closer or maybe a bit higher than the actual equilibrium price), or suppliers might begin to auction rights to a product to "favored customers" (i.e. some people will bribe the suppliers to have access to the shortage product, essentially raising the price), or people might have to wait in line to get a product when supply is limited (and since time can be connected with income, spending time is like spending money, exactly like a higher price). Ultimately, price ceilings, unless strictly regulated, have little effect on the market overall, and tends to promote cheap or illegal activities.
- sellers always want higher prices to sell at, buyers want the opposite, its in the negotiation of value of the underlying asset that the equilibrium is found
