Supply , Demand and Governament policies

In a free market system, market forces establish equilibrium prices and exchange quantities.


Controls on Prices:-
•Buyers always want lower prices, while sellers want higher prices. 
• Thus, interests of these two groups conflict. 
• Controls on prices are usually enacted when policymakers believe the market price is unfair to buyers or sellers.
• For this government creates price ceilings and price floors.


Controls on Prices Cont..:-
• Price Ceiling: –  A legal “maximum” on the price at which a good can be sold. 
• Price Floor: –  A legal “minimum” on the price at which a good can be sold.


 When govt. imposes price ceiling, following two outcomes are possible: 


1. If price is set above the equilibrium price, price ceiling is not binding .
2.• Price ceiling has no effect on the price or quantity sold .


Controls on Prices Cont… 
How Price Ceilings Affect Market Outcomes (Cont.): 
 • If price is set below the equilibrium price, price ceiling is a binding constraint.
 • The forces of demand and supply move price towards equilibrium price.
 • But when market price hits the ceiling, it can rise no further.
 • Thus, market price equals price ceiling
 • At this price, quantity demanded exceeds quantity supplied, creating shortage for the good.




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