Simple applications of Tools of Demand and Supply curves

Simple applications of Tools of Demand and Supply curves

In this we study about government intervention in the commodity market these are (1) Price Ceiling and (2) Price Floor

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Price Ceiling

Essentials of life (like food grains life saving medicines) are found to be scare in developing economy. Therefore , their open market price are often very high . The bulk of poor people find it difficult to buy them. In this situation government introduced price ceiling.

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It means a maximum price fixes by the government for a commodity which is generally lower than the equilibrium market price.

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Figure 1 A Market with a Price Ceiling

(b) A Price Ceiling That Is Binding

Quantity of

Ice-Cream

Cones

0

Price of

Ice-Cream

Cone

Excess demand of good shows that people fail to buy product (unfulfilled demand ) , this problem solved by the government by adopting rationing system (PDS) .

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Price ceiling with PDS has some demerits , these are:

1: Long queues

2: May be low quality product

3: Rationing goods may be sold in BLACK MARKET

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DBT An Alternative mode: Direct Benefit Transfer

Implication

Price floor

Some time due to good weather condition there is a glut (excess supply ) in the market of farm product (like wheat and rice). It leads to price crash , this situation leads to compel the farmer to cut his cultivation. To regulate the income of the farmer government adopt the price floor policy.

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It means a minimum price fixed by the government for a commodity which is generally higher than the equilibrium market price.

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(a) A Price Ceiling That Is Not Binding

Quantity of

Ice-Cream

Cones

0

Price of

Ice-Cream

Cone

The market clears at 3 and the price ceiling is ineffective.

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In this situation , now government offers support price to the farmers. It is a price at which government buy the entire product of the farmer which they fail to sell in the open market. In fact floor price implies support price (MSP).

Implication