1. In a perfectly competitive market in long-run
equilibrium, what would be the immediate
results of imposing and enforcing a price ceiling
below the equilibrium price of the product?
What would be the long-run effect of continuing
to enforce the ceiling price, assuming black
markets do not develop? Be sure to explain why
the predicted effects will occur.
1. In a perfectly competitive market in long-run
equilibrium,
MC
LRATC
P
a
MR=D=AR = P
S
P
D
q
0
TR = 0paq
TC = 0paq
Q
1. In a perfectly competitive market in long-run
equilibrium, what would be the immediate
results of imposing and enforcing a price ceiling
below the equilibrium price of the product?
MC
S
LRATC
MR=D=AR = P
P
P
Pc
D
q
Qd Q> Qs
Imposing and enforcing a price ceiling lowers the
price, this causes quantity demanded to decrease
and quantity supplied to increase.
When Qd is greater than Qs, this causes a shortage
in the market place.
MC
LRATC
MR=D=AR = P
P
P1
S
P
MR1=D1=AR1=P1
Pc
D
q1 q
Qd Q Qs
Since all the firms in a perfectly competitive market
are price takers, they will take the ceiling price.
Each firm will lower its price. Each firm’s output
decreases to where MR1 = MC.
What would be the long-run effect of continuing
to enforce the ceiling price, assuming black
S1
markets do not develop?
S
LRATC
d
c
MR=D=AR = P
P
P
MR1=D1=AR1=P1
b
P1
Pc
D
0
Qd Q Qs
q1 q
Since firms would be earning below economic
profits, TR = 0P1bq1, TC = 0dcq1
Economics profits are less than 0, P1dcb
Firms would exit the market.
Be sure to explain why the predicted effects will
occur.
S1
d
P
P1
c
b
P1
MR=D=AR = P
P
LRATC
S
MR1=D1=AR1=P1
Pc
D
0
q1 q
Qd Q Qs
As firms exit the market the firms in the market
would like to charge the market price P1,
but since they are forced to charge the Pc, there
will be no firms willing to supply at the ceiling
price.