Which of the following is most likely to create a shortage of an item in a competitive market?

• A. Imposing a price ceiling below the equilibrium price
• B. Decreasing the demand for the item
• C. Increasing the supply of the item
• D. Imposing a price floor above the equilibrium price

Answer: (A)

Verified step by step guidance

1. Step 1: Understand the concept of equilibrium price in a competitive market, which is the price where the quantity demanded equals the quantity supplied.
2. Step 2: Recognize that a price ceiling is a legally imposed maximum price that sellers can charge, and if set below the equilibrium price, it prevents the price from rising to the market-clearing level.
3. Step 3: Analyze the effect of a price ceiling below equilibrium: at this lower price, quantity demanded increases while quantity supplied decreases, leading to a shortage (excess demand).
4. Step 4: Contrast this with other options: decreasing demand lowers equilibrium price and quantity, increasing supply raises equilibrium quantity and lowers price, and a price floor above equilibrium causes a surplus (excess supply), not a shortage.
5. Step 5: Conclude that imposing a price ceiling below the equilibrium price is most likely to create a shortage because it disrupts the natural balance of supply and demand by capping the price too low.