Real Estate Council of Alberta Fundamentals Practice Exam

How does a price ceiling affect the market for goods?

1. It raises the equilibrium price

2. It creates a surplus of goods

3. It creates a shortage of goods

4. It stabilizes the market

The correct answer is: It creates a shortage of goods

A price ceiling is a government-imposed limit on how high a price can be charged for a product or service. When a price ceiling is set below the equilibrium price, it prevents suppliers from charging a price that would balance supply and demand. In this scenario, because the price is kept artificially low, demand for the good tends to increase since consumers are attracted to the lower price. However, suppliers are less willing to produce or supply the good at this lower price, which can lead to a situation where the quantity demanded exceeds the quantity supplied. This imbalance results in a shortage of goods. Consumers find themselves unable to purchase the quantities they desire because sellers are not incentivized to produce enough at the lower price point. Consequently, the shortage arises as the demand at the lower price outstrips the supply available in the market. In this context, understanding how a price ceiling influences market dynamics is crucial. The interaction of supply and demand under such regulation leads to significant misalignments in the market, with demand exceeding supply, thus confirming that a price ceiling creates a shortage of goods. This highlights the impact of regulatory policies on market behavior and the unintended consequences they may have.