Final answer:
A price ceiling is a maximum price that can be charged for a product or service. It has the largest effect when it is substantially below the equilibrium price, creating excess demand. The demand and supply diagram can be used to illustrate this situation.
Step-by-step explanation:
A price ceiling is a maximum price that can be charged for a product or service. If the price ceiling is set at $10, it means that the price cannot exceed $10. A price ceiling will have the largest effect when it is substantially below the equilibrium price. This creates excess demand, as the price is artificially low and more people want to buy the product than can at that price.
For example, let's say the equilibrium price for a particular product is $15. If a $10 price ceiling is implemented, the price cannot go above $10. This means that there will be excess demand for the product, as more people are willing to buy it at $10 than there are units available at that price. This can lead to shortages and rationing of the product.
If you were to graph this situation on a demand and supply diagram, you would see that the demand curve intersects with the price ceiling line below the equilibrium price, indicating excess demand.