ACCA Applied Knowledge · Business and Technology · Microeconomic factors
A market is in equilibrium at a price of $20. The government then imposes a legal maximum price of $15 on the product. Which outcome is most likely?
A shortage is most likely. A binding price ceiling below the $20 equilibrium raises quantity demanded and reduces quantity supplied, so demand exceeds supply at $15. The price cannot legally rise to clear the market.
- AA surplus, because suppliers produce more at the lower price
- BA shortage, because quantity demanded exceeds quantity supplied at $15Correct
- CNo change, because the market always returns to $20
Explanation
A maximum price set below equilibrium is binding. At $15 consumers want more and suppliers offer less than at $20, so demand exceeds supply, creating a shortage. Option A reverses the effect of a lower price on supply.
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