Module 2 - Case SUPPLY AND DEMAND

Module 2- Supply and Demand Name of the Student Institutional Affiliation Course Code and Course Name Professor Date of Submission Question 1 * A price ceiling is a governmental intervention that usually occurs below the prevailing market price. It is a regulatory measure that prevents the cost of a good or service from rising above a threshold set by the authorities (Bilousova, 2023). * One perfect example of a price ceiling is the common practice of rent control in cities where the demand for houses is high and the supply is limited. Rent control limits the maximum amount that the owner can charge his tenants. Now, discussing some of the significant benefits of price ceilings: First, they enhance affordability by making essential products more available, especially in markets susceptible to price spikes due to increased demand. They also provide social equity to ensure those with lower incomes can attain basic needs such as housing for equality. In addition, price ceilings create market stability, especially in environments where prices are likely to suddenly fluctuate, hence a sense of predictability to consumers and producers (Mulligan, 2024). These benefits do not come without their costs of price ceilings. However, one primary concern is the possibility of shortages wherein suppliers would be less likely to supply goods and services for prices lower than the market equilibrium price, thus creating imbalances in supply and demand. Thirdly, there could be a decline in the quality of the ultimate product since producing firms would be allowed to lower or cut corners on standards to compensate for low prices and maintain yields. Similarly, artificially low prices spawn illegal activities like black markets, where products are sold at inflated prices outside of the confines of the price ceiling to render them ineffective. Question 2 To understand why increasing the price of admission would reduce total revenue for the art museum, consider the concept of the price elasticity of demand. The price elasticity of demand is the responsiveness of the quantity demanded of any good to a change in its price; this would, in this context, imply that because the price went up and yet the total revenue fell, the demand for entrance into museums is elastic. When demands are elastic, a rise in price leads to a more significant fall in quantity demanded, translating to a fall in total revenue. Explaining this to the museum director, it should be pointed out that while increasing prices is an easy strategy for revenue increase, there is an underlying consumer response to consider. For the art museum, visitors are much more sensitive to its price than expected, especially if it is not the only museum or other cultural attractions or forms of entertainment. This means the price has exceeded the elasticity threshold, where quantity can no longer compensate for a higher price...