General tips on structure:
- This type of question would be a part (b) on a paper 1, so you would first use the DEED method to explain the situation, and then discuss the impacts on stakeholders
- The first D stands for definition, so your very first line should be defining the key terms in the question
- The E stands for explanation, so you explain what is going in
- The second E is for example, include a relevant example in your essay and examiners will give you higher marks, they love students who can use good examples!
- The last D is for a diagram, it is good to include a diagram in all questions that you answer, it shows understanding and gives clarity to your answer
Answering the question
1. Define the key terms, in this question there is only one - price ceiling; which is a legal maximum price that is set by the government, generally below equilibirum.
2. Draw the diagram of a price ceiling. Always use a pencil and not a pen, so that you can erase it if you make a mistake. Label the axes, use a ruler, and make sure it takes up at least a third of the page.
3. Explain what is happening on the diagram that you just drew, reffering specifically to the figures you used. This is an example of what can be said: The impact of a price ceiling is shown above in diagram 1. The original equilibrium price and quantity are P1 and Q1 respecitvely. However, when the price ceiling is imposed (shown as Pmax) there is a decrease in the quantity supplied to Qs and an increase in the quantity demanded, now Qd. As the quantity demanded is greater than the quantity supplied, a shortage arises in the market.
4. Use an example that is relevant, in order to show understanding. For example you could say: An example of a price ceiling is the rent controls in New York City, where the state has imposed a legal maximum rent that can be charged for apartments.
5. Draw another diagram, and include the consumer surplus, producer surplus and welfare loss that arises as a result of a price ceiling.
6. Discuss the impacts of price ceilings on consumers, for example: The imposition of a price ceiling will have mixed impacts on consumers. Some consumers win because they are able to buy the good at a lower price, as it is now more affordable. However, other consumers lose because there is excess demand, therefore even though they are willing to pay for the good, they are not able to buy it due to limited supply. This is also shown in the diagram above, where one area of consumer surplus is lost, but another is gained.
7. Discuss the impacts on producers, for examples: Producers are overall worse off as a result of the price ceiling. This is because they must charge a lower price and sell a lower quantity than before, therefore their total revenue falls, likely having negative effects on total profit. This can also be seen on the diagram above, where producer surplus falls significantly as a result of the price ceiling.
8. Discuss the impacts on society as a whole, for example: As a whole, society is also worse off, as a welfare loss arises in the market. This welfare loss can be seen on the diagram above, and it means that overall, the total satisfaction gained by all members of society is lower when a price ceiling is imposed.
9. Write a conclusion about what you have found - be definite and decisive, examiners love when you are certain about what you are saying in the conclusion!