Price ceiling

A price ceiling prevents prices from going higher than the imposed price level set by the government. As a result, shortages are created if the price ceiling is below the current market equilibrium. Producers would have to cut back on production or make only what they can to prevent losses as the marginal cost to produce extra units would affect their revenue. If that is not the case, producers simply go bankrupt because they can't sell their products at a price where revenue is optimal. As more producers go bankrupt because they can't profit from the price limit, it is obvious that the quantity supplied is now less while buyers are now partying at the now much lower price of booze wanting to get as much as they can and party for an entire month. But because quantity supplied is now less and quantity demanded has increased, the buyers are out of luck because there is now a shortage of booze and would just resort to fruit punches.


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