Question

In 301 AD, the Roman emperor Diocletian issued his “Edict on Maximum Prices,”

which imposed price ceilings on various goods across the Roman empire: beef, beer,

wine, shoes, lions, silk, etc. As a result, merchants either stopped producing goods, or

sold goods illegally. Based on economic theory, would you expect such a result? Explain,

using a diagram.

1

Answer 1

Ans. This is an interesting question , Let's start answering it :

Yes , We would surely expect such a result. Let us first see the diagram followed by explanation.

Now suppose that this diagram represents the Market of any of the good mentioned in the question. That product is in equilibrium where $30 is the Equilibrium Price and Q is the Equilibrium Quantity. Now , because of price Ceiling , Price of the good becomes $27 and at thr Quantity Supplied becomes Q2 and Quantity Demanded becomes Q1. This means that there is more quantity demanded than the quantity supplied which leads to a Shortage and thus it would eventually lead to black markets . Now because of decrease in price , producers would also supply less ( Law of Supply ) , hence merchants may stop producing goods.