If a maximum price is set below the market equilibrium price, which outcome is most likely?

If a maximum price is set below the market equilibrium price, which outcome is most likely?

• A. Supply shortages due to excess demand
• B. Surplus of supply
• C. Equilibrium price remains unchanged
• D. Demand collapses completely

Answer: (A)

A maximum price set below the market-clearing level creates a binding constraint on price. With the price kept too low, producers supply less than at the equilibrium, while consumers want to buy more because the good is cheaper. This mismatch leads to a shortage, where quantity demanded exceeds quantity supplied. A surplus would come from a price floor or a ceiling above the equilibrium, not below. The equilibrium price cannot be maintained when the price is artificially held down; it will not stay unchanged. Demand isn’t completely eliminated at a low price, so “demand collapses completely” isn’t correct. In short, the binding below-equilibrium price causes excess demand and a shortage.

A maximum price set below the market-clearing level creates a binding constraint on price. With the price kept too low, producers supply less than at the equilibrium, while consumers want to buy more because the good is cheaper. This mismatch leads to a shortage, where quantity demanded exceeds quantity supplied. A surplus would come from a price floor or a ceiling above the equilibrium, not below. The equilibrium price cannot be maintained when the price is artificially held down; it will not stay unchanged. Demand isn’t completely eliminated at a low price, so “demand collapses completely” isn’t correct. In short, the binding below-equilibrium price causes excess demand and a shortage.