The original equilibrium E₀ lies where supply S₀ meets demand D₀: a rent of $500 and 15,000 rental units. Greater income or a change in tastes shifts demand to the right, from D₀ to D₁. At the new equilibrium E₁ the rent would rise to $600 and the quantity to 17,000 units.
Now suppose the city passes a rent control law holding the price at $500. The horizontal line is that legal maximum. The forces that shifted demand are still there: at $500 the quantity supplied stays at 15,000 units, but the quantity demanded is 19,000. Quantity demanded exceeds quantity supplied, so there is a shortage of rental housing.
One irony of price ceilings: fewer apartments are rented under the ceiling (15,000) than would be at the market rent of $600 (17,000). Move the ceiling above $600 and it stops binding; the market simply settles at E₁.
| Price | Original quantity supplied | Original quantity demanded | New quantity demanded |
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