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.

Answer 1

Price Supply SP SP' Demand Q' Q" Quantity

In the diagram above , demand and supply curve for market of various consumer goods are drawn. Here, market equilibrium is attained at point e where, equilibrium quantity is Q units and equilibrium price is $P. Now, due to imposition of price ceiling at $P', quantity demanded increases to Q'' units whereas, quantity supplied decreases to Q'. Thus, at lower prices producers earn losses. So, the producers may either stop production or start selling the goods illegally.