Reading 15: Markets in Action

LOS a, (Part 1): Explain market equilibrium, distinguish between long-term and short-term impacts of outside shocks

1.New legislation setting a price ceiling will most likely cause:

A)   a market surplus.

B)   a market shortage.

C)   a decrease in demand.

D)   an increase in production.

The correct answer was B)

Price ceilings restrict the producer from increasing the selling price. The lower price will stimulate demand by consumers at this lower price. However, since producers will not be able to increase price there is little incentive for them to increase supply. Hence, production and supply will be limited at the price ceiling leading to a market shortage.