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The figure above shows a market equilibrium at the price of $1000. At the equilibrium level there are 2 million apartments demanded and supplied at this market price and so the market clears out. Students should appreciate the role of price in clearing the market. Prices work as signals in a free market system. Prices also ensure that there is no shortage or surplus in equilibrium. That is, the prices clear out. Our economics tutors in London are available for in-person private lessons designed for A levels, IB, GCSE, IGCSE and undergraduate students.
Price Ceiling is imposed
If rental for apartments is fixed at $800 through a price ceiling, it creates a shortage of apartments. The market does not clear out at $800 in rent. At this rent, the quantity of apartments demanded is 2.2 million. Whereas, the quantity of apartments supplied is 1.8 million. Therefore, this leads to a shortage of apartments. Consumers who are able to rent the apartment pay $800 as compared to $1000. However, not every consumer who is looking to rent an apartment is able to find one.
As a result, the consumer surplus goes up for consumers who are able to get an apartment. In contrast, producer surplus goes down because they earn less due to rent being controlled. Consequently, there is also a deadweight loss due to inefficiency.
Price floors are another type of price controls to stop prices from dropping too low. Such as, in the case of agricultural products. As a result of price floors, there is a surplus in the market.
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