A price ceiling is a micro-economic concept that can be implemented in an economy or within a single market or within a single industry. It is a cap or ceiling on the prices of a commodity that is often implemented by the government or by all the sellers collectively, who operate within that very market. The concept is quite simple and is often used to ensure the welfare of people.
About Price Ceilings
Several times, you may have come across the terms price ceiling and price floor. These two concepts are integral factors of the consumer economy and market. The logic is fairly simple. The price of any commodity is valued in accordance with the volume demanded and volume supplied. The higher (more units demanded) the demand of goods the higher is going to be the price and more the supply against less demand the lower the price. This logical principle was stated in the book Wealth of Nations by Adam Smith. In order to understand the concept properly, we need to understand the phenomenon of normal markets. Based upon a specified costing and accounting procedure the appropriate cost of a commodity is defined. This cost is later modified in accordance with the units that are demanded per year, day, month or week, by consumers. The aforementioned principles of demand and supply analysis thus comes into the picture.
In cases where high demand low supply is observed, the price escalates beyond limit and it becomes difficult for common consumers to get commodities. In situations where the price escalates naturally, or as a result of uncontrollable conditions, the government takes measures through banking and fiscal systems. However, often, there are situations where suppliers use unethical means such as artificial scarcity, disappearance of goods, black market transactions and hoarding, to increase the demand over time. The government puts a cap on the level of sale price in such a situation and market equilibrium, demand and supply force confluence as seen in the graph does not apply. This kind of policy, in most cases, is used to curb the cost of essential goods and commodities, such as food, medicines, etc. The basic aim of implementing such a price control is to ensure that people do not to pay exorbitant costs for commodities of survival. There are two types of ceilings, namely, binding price ceiling and non-binding price ceiling. In the diagram you can see a point of equilibrium, a place where the supply units and units demanded derive the price of the commodity. The binding ceiling is determined to prevent unethical price rise and activities, hence it always below the point of equilibrium. On the other hand in order to check the inflation and general price levels, governments and companies in a specified industry impose the price level. In several cases, a 'maximum retail price' is mentioned on the product which is of course a ceiling or below the said ceiling.
Real-life Examples of Price Control
There are several real-life examples of price control which are observed and the following are some prominent examples.
- Medicine: Medicine is largely a necessity of survival hence, there are several cases and products where price ceiling is used to keep the retail cost to bare minimum. As a general principle, the cost of basic drugs and medications is usually kept within the paying parity of the people, that is the average per capita income.
- Rent: An excellent example is rent. Cities like New York and Helsinki have such price controls for the convenience of the people.
- Retail Food: In certain nations which have a hint of socialism in their economy, have a minimum retail price that is printed on the product.
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