In this module, you are required to learn the basic theories of supply and demand. Supply and demand are the forces that make the market function. You will also study the concept of elasticity. Elasticity is the measure of responsiveness of one variable from a change in another variable. In this course, we focus on the price elasticity of demand. It is ratio of the percentage change in quantity demanded to the percentage change in a price of a good. Essentially, it measures how consumers respond to changes in price. Please read the following materials (be sure to read the required sections)
Supply and Demand
Question 1 (a)
Price ceiling refers to a government-imposed maximum price on a particular product and is set below the natural market equilibrium. The equilibrium price level is a price that is arrived at when the quantity demanded is equal to the quantity supplied for a particular commodity (Adil, 2013). When a price ceiling is set to be above the market price, there is no perceptible effect in the short run. On the other hand, when the price ceiling is set below the market price, this will be noticeable as it will cause shortage of goods, there will be more demand and less supply that will distort the equilibrium price (Adil, 2013). Therefore, there will be more quantity demanded than the quantity supplied leading to inefficiency market condition known as allocative inefficiency occurs because the price ceiling quantity supplied the marginal benefit exceeds the marginal cost. Hence the price ceiling is set below the market price.
Question 1 (b)