Price ceiling

A price ceiling is a price control that a government is enforced or set boundary on how high a price should be charged for a product and should not be rise. Governments in Brazil propose price ceilings on the gasoline prices to protect the consumers from experiencing situations where the commodities are unachievable. (econport, 2015)

However, imposing price ceiling must be rational to prevent it from causing negative effect on the economy of Brazil as it will alter the market supply and demand. Therefore, it should be set under the natural market equilibrium of the economy.

At the price of gasoline where it is set at the price ceiling, there are more demand of it than the equilibrium price. The supply of gasoline is also lesser than there is at the equilibrium price as price ceiling cause shortages, because demand will increase when the supply decreases thus, the quantity demanded of gasoline is more than the quantity supplied.

Based on the above diagram, the price ceiling of the gasoline is set below the market price, there will be an excess demand or a supply shortage from the consumers and the gasoline producer as they cannot change their output very quickly, and if they cannot adjust the gasoline output quickly the price will falls drastically. (fundamentalfinance, 2015)

Gasoline would not produce in a big amount at the lower price but the consumers will demand more because it is much cheaper. When the demand of gasoline increases suddenly, the price rises, acting as a controlling mechanism for the rise of demand.

In this graph, the demand will exceed the supply, if there are a lot of people who wants to buy gasoline at a lower price is limited. Gasoline producers are truly harmed, as their surplus is hitting doubly with a drop in the number of companies willing to take that in lower price, and those who stays in the market have to take a lower price.

However, the implementing of price ceiling in Brazil does not benefit the substitutes like ethanol as the demands of the consumers will only gather around the lower price of gasoline. It causes ethanol to face a major problem of closing up as it has clearly affected ethanol profit.