Question 2

Suppose the government establishes a price ceiling for chicken.

What might prompt the government to establish this price ceiling?
Explain carefully the main effects. Suppose the government
establishes a price floor. What will be the main effects of this price
floor?

In the free market, human interaction is voluntary. People freely choose to

trade when they believe it to be in their interests. However, it is the
responsibility of the government to set up incentives so that the free market
can operate for the benefit of the people.

By establishing a price ceiling for chicken, the government is actually

drawing a line protecting the public interest. Setting a maximum limit for the
price of chicken is part of efforts to tackle record inflation in the country. By
doing so, it will enable a certain portion of the population to purchase
chicken that they couldn't afford at market costs or at equilibrium price. In
other words, price ceilings are often intended to protect consumers from
certain conditions that could make necessities unattainable.

Price ceiling has to be set below the equilibrium of free-market price in order
to be effective. However, this may have several effects. Chicken supplier
cannot enjoy the same price as at equilibrium free market. As a result, they
would rather decrease the supply due to the high cost of production. Some of
them even drop out of the market. The reduction of quantity supplied can be
shown in the Graph A. The quantity supplied dropped from Q0 to Qs.

Graph A: Price
Price Ceiling

Equilibrium
P0

P1 Price Ceiling
Shortage of
Supply
D

Qs Q0 Qd Quantity
From the consumer sides, the price ceiling may lead to the increase of
quantity demanded as they can purchase the chicken at a lower price than
the equilibrium price. The graph shows that the quantity demanded increase
from Q0 to Qd as a result of price reduction due to price ceiling set by the
government.

When a price ceiling is set, a shortage of quantity comes into sight. Demand
for chicken is more compared to quantity supplied. Consumers cannot buy as
much as they would like to due to limited quantity supplied.

However, some argue that the ceiling price only benefited wholesalers and
retailers and not the consumers as they always sold chicken at the ceiling
price and not based on the lower price they buy from the farmers.