Assume you’re a policymaker in Washington DC. Lobbyists for pre-schoolers of America have put pressure on their representatives to cap prices on graham crackers. You’ve been assigned a position on the new committee to study the impact of the price ceiling on graham crackers. A price ceiling is a maximum price which can be charged. This is set BELOW the equilibrium price.
Your job is to:
a.) Demonstrate by using a supply and demand graph what such an artificial price looks like.
b.) Illustrate what the results of such a move are for graham cracker market. In other words, will there be a SHORTAGE, a SURPLUS, or neither created?
c.) At last, what are the impacts of this price ceiling for those who desire to buy graham crackers? (In other terms, what is the unintended effect of this action?) Given that there is the max price set, it will only be affordable to manufacture a certain number in order to be cost effective for the manufacturer. Which, in turn, will create a shortage.