Glossary term
Price Ceiling: Meaning and Definition
Reviewed and approved by Dr. Anamika ShrivastavaPublished Last updated
A price ceiling is a government-imposed upper limit on the price of a good or service. To have any effect it must be set below the equilibrium price. It creates excess demand, a shortage, which is usually managed through rationing, and can give rise to queues and black markets.
In more detail
A ceiling that is set above the market price has no effect, because the market already clears below it. A binding ceiling cuts the price paid by buyers who can get the good, but fewer units are supplied, so some buyers queue or turn to black markets. Rationing or fair price shops then share what is available.
Example
If the equilibrium price of wheat is ₹40 and the government fixes a maximum of ₹30, buyers want 380 units but sellers offer only 280. Ration cards and fair price shops share out the limited supply.
Key points
- It is set below equilibrium.
- It causes excess demand.
- Typical examples are ration shop prices and controlled prices of essential medicines.
Common mistake
Calling any price limit a ceiling. It binds only when set below equilibrium.
Related terms
Where it is explained
This term is explained in Class 12 Microeconomics Chapter 5: Market Equilibrium.