# If the government puts in a price ceiling, will this result in a shortage or surplus?

sullymonster | Certified Educator

A price ceiling is a fixed price established by the government that limits how much can be charged for an item.  For example, the government could rule that \$5.00 is the maximum price that can be set for a hamburger (this is obviously a hypothetical situation).

The effect of a price ceiling depends on its relationship to market price.  If the market price of a hamburger is constant at \$3.00, then the \$5.00 rule will have very little effect.  However, if the market price has been \$10.00, then the price ceiling will have wide-reaching effects.  Any seller charging over \$5.00 will immediately have to lower their price - this will cause many sellers to immediately drop out of the market because they will not receive the same financial benefit from being in the market.  Because sellers will be dropping out, the supply will decrease.  In addition, because buyers can now get the product at a lower rate, more will buy the product.  This will also cause the supply to decrease.

So, if a price ceiling is set below market value, surplus will be eliminated and an ensuing shortage can occur.

rachellopez | Student

A ceiling is a fixed price for a certain item or service. If the government put a ceiling on something, a surgery for example, for \$20,000 but the actual cost for the procedure was \$30,000 the companies would lose money. Any hospital that charged more for surgeries would have a shortage of money and supplies, but probably get more customers because of the cheaper options. This would cause demand to be over supply and you would have a shortage.

etotheeyepi | Student

My grandparents lived through price controls during the Nixon Administration. A government agency set the price ceiling for each product at its price on a particular day. That resulted in a shortage of less expensive products.

For example, a retailer sells for shirts at \$20, \$15, \$10, and \$5.  The \$5-shirts disappeared from the store shelves.

revolution | Student

Price celling is a term used to describe the method the government used to imposed a limit on a price charged for an product.

If the government does that, it may result in a shortage or a surplus, depending on the matter at hand. Likr if the government fixed a price that this particular Nokia phone should be fixed at \$5 so that it would be more affordable for consumers, than companies who sell this product at a price more than \$5 would have to lower their price to that less than \$5, like \$3. This may have a negative impact to it, as this may force investors to back off from this phone's market, so reducing supply and causing a shortage. The lowered price would cause more people to buy the product, so the supply would be tightened.

But, if the price ceilling is higher than the actual price, then there is no effect or maybe a surplus if need be.