With reference to "Price Ceiling", consider the following statements: 1. It is a government-imposed upper limit on the price of a good or service. 2. It is generally fixed above the market-determined equilibrium price. 3. It often leads to excess demand and shortages in the market. Which of the statements given above is/are correct?

The correct option is 1 and 3 only. Explanation A price ceiling is a form of government intervention in the market mechanism where a legal maximum price is established for a specific good or service. This policy is typically employed to make essential goods affordable for the general population. Statement-wise Analysis - Statement 1 is Correct: A price ceiling is defined as a government-imposed upper limit on the price that can be charged for a product. Sellers are legally prohibited from selling the good at a price higher than this limit. - Statement 2 is Incorrect: To be effective (binding), a price ceiling must be fixed below the market-determined equilibrium price. If the ceiling is set above the equilibrium price, it has no effect on the market because the market will naturally clear at the lower equilibrium price. - Statement 3 is Correct: When a price ceiling is set below the equilibrium price, the lower price stimulates an increase in the quantity demanded while discouraging production, leading to a decrease in the quantity supplied. This imbalance results in excess demand, commonly known as a shortage in the market. Key Takeaway Price Ceiling is a maximum allowable price set by the government. For it to impact the market, it must be set below the equilibrium price, which inevitably leads to excess demand (shortage).

With reference to "Price Ceiling",… - NCERT Class 12 Economics MCQ

NCERT Class 12 Economics — Chapter 2: Market Equilibrium

mcqmedium

With reference to "Price Ceiling", consider the following statements:

It is a government-imposed upper limit on the price of a good or service.
It is generally fixed above the market-determined equilibrium price.
It often leads to excess demand and shortages in the market.

Which of the statements given above is/are correct?

NCERT textbook question

From NCERT Introductory Microeconomics · Page 84

Options

A1 and 3 only
B1, 2 and 3
C2 only
D1 only

Did you get this right?

Solution

The correct option is 1 and 3 only.

Explanation

A price ceiling is a form of government intervention in the market mechanism where a legal maximum price is established for a specific good or service. This policy is typically employed to make essential goods affordable for the general population.

Statement-wise Analysis

Statement 1 is Correct: A price ceiling is defined as a government-imposed upper limit on the price that can be charged for a product. Sellers are legally prohibited from selling the good at a price higher than this limit.
Statement 2 is Incorrect: To be effective (binding), a price ceiling must be fixed below the market-determined equilibrium price. If the ceiling is set above the equilibrium price, it has no effect on the market because the market will naturally clear at the lower equilibrium price.
Statement 3 is Correct: When a price ceiling is set below the equilibrium price, the lower price stimulates an increase in the quantity demanded while discouraging production, leading to a decrease in the quantity supplied. This imbalance results in excess demand, commonly known as a shortage in the market.

Key Takeaway

Price Ceiling is a maximum allowable price set by the government. For it to impact the market, it must be set below the equilibrium price, which inevitably leads to excess demand (shortage).

Your note

More from Chapter 2: Market Equilibrium

In the context of market equilibrium, what happens when the market demand curve shifts rightward while the supply curve remains unchanged ?

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In a market with free entry and exit, if the demand curve shifts to the left: Statements: 1. Firms will enter the market to capture the lower price. 2. The market price will temporarily fall below the minimum average cost. 3. The supply will increase until the price returns to the minimum average cost. Which of the statements given above is/are correct?

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What is the primary consequence of a price ceiling accompanied by rationing?

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With reference to the supply of labour by an individual, consider the following statements: 1. An increase in wage rate always leads to an increase in the supply of labour hours by an individual. 2. At high wage rates, the income effect may dominate the substitution effect, leading to a decrease in labour supply. 3. The individual labour supply curve can be backward bending. Which of the statements given above is/are correct?

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In a perfectly competitive market, if the market price is above the equilibrium price, there will be:

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