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# GDB-1 ECO402

The Case:

Sugar is one of the most important food ingredients that are used today. Sugar is necessary for the life because it gives energy in the human body, which is required in several human functions. No matter how strict our diet is, but sugar is present in many eating items. In 2009, the retail price of sugar was Rs. 47 per kg. It was the equilibrium price in the competitive sugar market. As sugar is an essential food item so the government decided to provide relief to the sugar consumers by setting its price below the equilibrium level (price ceiling) i.e. Rs. 40 per kg.

Requirement:

In the light of above discussion, logically discuss the consequences of this price ceiling by discussing its impact on the consumers, producers and on the overall society.

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If the price ceiling is above the market price, then there is no direct effect. If the price ceiling is set below the market price, then a "shortage" is created; the quantity demanded will exceed the quantity supplied. The shortage may be resolved in many ways.

The shortage may be resolved in many ways.One way is "queuing"; people have to wait in line for the product, and only those willing to wait in line for the product will actually get it. Sellers might provide the product only to family and friends, or those willing to pay extra "under the table". Another effect may be that sellers will lower the quality of the good sold. "Black markets" tend to be created by price ceilings.

## Price ceilings

Laws enacted by the government to regulate prices are called price controls. Price controls come in two flavors. A price ceiling keeps a price from rising above a certain level—the “ceiling”. A price floor keeps a price from falling below a certain level—the “floor”.
We can use the demand and supply framework to understand price ceilings.
In many markets for goods and services, demanders outnumber suppliers. Consumers, who are also potential voters, sometimes unite to convince the government to hold down a certain price.
For example, when rents begin to rise rapidly in a city—perhaps due to rising incomes or a change in tastes—renters may press political leaders to pass rent control laws, a price ceiling that usually works by stating that rents can be raised by only a certain maximum percentage each year.
Let's expand this example by thinking about a hypothetical town. Rent was fairly stable. But then, the town was featured on a top-ten-places-to-live article in a popular magazine. Eventually, rent control laws were passed.
We can use the demand and supply model below to understand how the market changed based on this event.
The equilibrium, \text{E0}E, 0, lay at the intersection of supply curve \text{S0}S, 0 and demand curve \text{D0}D, 0, corresponding to an equilibrium price of $500 and an equilibrium quantity of 15,000 units of rental housing. When the article inspired more people to want to move to our imaginary town, it shifted the demand curve for rental housing to the right, as shown by the data in the table below and the shift from \text{D0}D, 0 to \text{D1}D, 1 on the graph. In the new market, at the new equilibrium \text{E1}E, 1, the price of a rental unit rose to$600 and the equilibrium quantity increased to 17,000 units.

ECO402 GDB Idea Solution

ECO402 GDB

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