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CA Foundation · Business Economics · Theory of Demand and Supply

Suppose the government imposes a price ceiling on essential medicines at ₹50 per unit, but the market equilibrium price would have been ₹75 per unit at an equilibrium quantity of 10,000 units. If the quantity demanded at ₹50 is 12,000 units and the quantity supplied is 7,000 units, which sequence of events is most likely to follow, and what is the economic consequence?

A shortage of 5,000 units emerges because the price ceiling prevents price from rising to clear the market. Although consumers gain from lower prices, rationing occurs and deadweight loss emerges as mutually beneficial trades at intermediate prices fail to happen.

  1. AA shortage of 5,000 units will emerge; consumers will benefit from lower prices but face rationing; deadweight loss will occur as potential mutually beneficial transactions are preventedCorrect
  2. BA surplus of 5,000 units will emerge; suppliers will reduce production and exit the market entirely
  3. CThe ceiling will be automatically removed by market forces, and price will return to ₹75
  4. DQuantity supplied will increase to 10,000 units within one month as suppliers respond to the ceiling

Explanation

At the ceiling price of ₹50, quantity demanded (12,000) exceeds quantity supplied (7,000), creating a shortage of 5,000 units. Consumers benefit from the lower price but cannot all purchase (rationing occurs). Deadweight loss arises because 5,000 units that consumers value at ₹50+ and producers could profitably supply are not transacted. Option 1 is backwards (shortage, not surplus). Option 2 ignores price control mechanics. Option 3 assumes instant supply response without accounting for real constraints.

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