Posted in Finance, Accounting and Economics Terms, Total Reads: 237
Definition: Price Ceiling
Price ceiling is a measure taken by the Government to regulate the price of a product. In a price ceiling, the Government would keep bounds on the price of a product, and so the product cannot be sold at a price higher than this level.
This is usually enforced to prevent unfair price levels which may be set by the seller. Price floor is another concept along similar lines, the difference being that in price floor, the Government sets a limit on how low the price of a product can be set.
The price ceiling can be illustrated in the graph as shown. When the price ceiling is below the equilibrium price, i.e., the price corresponding to the intersection of the supply curve and the demand curve, then we see that there is a resultant shortage of goods. This is because, suppliers are unwilling to supply more at the lower price, but the customers demand will be high, since the goods are cheaply priced.
For example, if the Government sets a price limit on the price of Wheat to control the rising wheat prices, it is an example of price ceiling. Another example of price ceiling is a rent control measure that is taken by the Government.