What happens when price ceiling is above equilibrium?
When the price ceiling is set above the equilibrium price, it is essentially a non-binding policy. This means that the price ceiling does not actually restrict the market price from reaching the equilibrium level. In such a scenario, the market operates as if there is no price ceiling at all.
The equilibrium price is the price at which the quantity demanded by consumers equals the quantity supplied by producers. It is the point where the market is in balance, and there is no excess demand or supply. When the price ceiling is above this equilibrium price, it does not affect the market dynamics because the market price is already lower than the ceiling.
In this situation, the price ceiling has no real impact on the market. Producers are still willing to supply the quantity of goods or services that consumers are willing to buy at the equilibrium price. Consumers, in turn, are still willing to purchase the quantity of goods or services that producers are willing to supply at the equilibrium price. As a result, the market continues to operate smoothly, with no excess demand or supply.
However, it is important to note that while the price ceiling has no direct impact on the market, it can still have some indirect effects. For instance, if the price ceiling is set arbitrarily high, it may lead to a situation where the market price is close to the ceiling but not exactly at the equilibrium level. This can create a perception among consumers and producers that the market is not functioning properly, even though it is.
Furthermore, the presence of a price ceiling above the equilibrium price can also have implications for the long-term stability of the market. If the price ceiling is perceived as a signal that the government is trying to control prices, it may discourage producers from investing in the market or expanding their production capacity. This could lead to a decrease in the overall supply of goods or services in the long run.
In conclusion, when the price ceiling is set above the equilibrium price, it does not have any real impact on the market. The market operates as if there is no price ceiling, and the equilibrium price is still determined by the forces of supply and demand. However, the perception of price control and potential long-term effects on market stability cannot be overlooked.
