Government Intervention – Price Control

Lets take up a role of Policy Maker and analyse how government policy affect the market outcome.


Government-controlled prices:

Not all markets are allowed to function freely. Supply and Demand may result in prices that are unfair to buyers or to sellers. Government may set a price and it may differ from the equilibrium price that the market sets.

This action will interfere with the “clearing function” which equilibrium conditions create. A shortage (as in the case of a price that is below equilibrium) or a surplus (as in the case of a price that is above equilibrium) is the result of these government price setting actions.

  • There are two types of price control: price ceilings and price floors. Price ceilings sets a legal maximum price at which a goods can be sold. A price floors  sets a legal minimum price at which a good can be sold.
  • Price Ceilings: In a competitive market, a price that is below the equilibrium causes shortages, because quantity demanded exceeds quantity supplied. The resulting shortage tends to put upward pressure  on price until it goes back to equilibrium and eliminating the shortage. On the  other hand, if the government sets a price ceiling that is above or higher than the equilibrium price, it will have no effect.

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What is Economics?

Economic issues affects are daily lives ,whether reading a newspaper on a report on “local market”, watching state of economy on the television news, even discussing with friends and colleagues regarding the price of a product or whether you can afford this or that.

Economic problem and making decision are part and parcel of our lives. What should I buy? Should I go into University or Tafe? Should I go to University or should I work and earn?

Cartoon Wants and Resourses

 What is Economics all about?

For economist, “scarcity” is the central economic problem.

What is scarcity?

Although our wants are unlimited, resources available to fulfill those wants are limited.

What is the solution?

People must make choices as they try to achieve their goals. This is the basic fact of life.

What does choices reflect?

Every choice reflects trade- offs or sacrifice as we are living in a world of scarcity. For every choice we make we pay a cost and that cost in economics is called Opportunity Cost.

This economic problem is also known as “scarcity problem”, which is an universal problem.

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