A price ceiling is a fixed price established by the government that limits how much can be charged for an item. For example, the government could rule that $5.00 is the maximum price that can be set for a hamburger (this is obviously a hypothetical situation).
The effect of a price ceiling depends on its relationship to market price. If the market price of a hamburger is constant at $3.00, then the $5.00 rule will have very little effect. However, if the market price has been $10.00, then the price ceiling will have wide-reaching effects. Any seller charging over $5.00 will immediately have to lower their price - this will cause many sellers to immediately drop out of the market because they will not receive the same financial benefit from being in the market. Because sellers will be dropping out, the supply will decrease. In addition, because buyers can now get the product at a lower rate, more will buy the product. This will also cause the supply to decrease.
So, if a price ceiling is set below market value, surplus will be eliminated and an ensuing shortage can occur.
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