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Explain the effects of a price ceiling Or Explain the effects of a price floor. |
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Answer» As price is lowered, it will cause excess demand for the good. SINCE there is shortage of goods, the sellers may TEND to hoard the goods. It implies the following : (i) Rationing (ii) Existence of black markets Or Price floor is the minimum price fixed by the government which the sellers can legally charge for the good or service. The price is normally set at a LEVEL higher than the market-determined (equilibrium) price. Since this price is above the equilibrium price, it will cause excess supply in the market. Since there is surplus, sellers may tend to cut prices. It implies the following : (i) Government buys the unsold stock (ii) Illegal selling. |
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