Demand And Supply

Supply, demand and government interventions This report focus on the effects of various government interventions in the market as far as demand and supply of a product is concerned. The report will specifically look at three type of government intervention namely taxation and price control (both price ceiling and price floor) A) Demand and supply curve Graph B) Equilibrium point In economic, the word equilibrium mean the point where demanded quantity equal supplied quantity. In the diagram above, equilibrium is the point in which the demand curve intersects with the supply curve. The corresponding price and quantity is known as equilibrium price and equilibrium quantity respectively (Dilts). As for the case above, the equilibrium price is equal to $ 125 while the equilibrium quantity equal to 1750 units C) The effect of special tax on demand and supply of a product Taxation has direct impact on the price of a commodity. It forces prices to increases. This in turn led to a shift in supply curve upward. For instance, in our computer cases, let assume the government introduced as special tax of 20 percent. The supply curve will shift upward as shown in the figure below It can be seen from the figure above that when special tax is introduced, the supply curve move upward. This indicated a fall in demand for the computer and increase in the equilibrium price/market price D) The effect of price ceiling on demand and supply of a product The government may also intervene in the market through price ceiling. Price ceiling involves restrict the price of a commodity by putting in place a certain limits as to how much a product should be sold. The aim of price ceiling is actually to protect customers from exploitation by supplier. When a price ceiling is put in place, the price, demand and supplier of the product are affected. Price ceiling discourage supplier and as such supply of that commodity goes down creating shortage (McAfee and Lewis). For instance, let assume the Government put in place a price ceiling of $ 100 for computers. This price is actually below the equilibrium price of $ 125. This denies suppliers the incentive to supply more and a shortage occurs. See the diagram below for more explanation. In the figure above, it can be noted that, when a price ceiling of 100 is put in place, the demand for the product increases to 2000 from the equilibrium quantity and at the same time, the supply decreases from 1750 units to 1600 units. Therefore, there will be a shortage of 400 units. E) The effect of price floor on demand and supply of a product Sometime, the government may impose a minimum price for a product. This means that supplier should not sell their product below that price. This price is known as price Floor. When a price floor is set by the government (which is usually above equilibrium price), it affect the operation of the market. The price of the product rises beyond the market price leading to a decrease on demand. On the other hand, Price floor give suppliers more incentive to supply more of their product. The market therefore ends –up having surplus of the product (McAfee and Lewis). For instance, let assume the government impose a price floor $ 150 on computers. This price is above the market price of $ 125 (as shown in section B) and as such supplies will be motivated to supply more in the market since profit margin will be bigger. On the other had buyer will hesitate to buy the product since the price is above the market price. This will create a surplus as show by figure below. It can be noted from the above figure that, when a price floor of $150 is put in place, the demand for the computer decreases from equilibrium quantity of 1750 units to 1500 units. The supply for the computer increases from equilibrium Quantity to 1900 units. There is therefore a surplus of 500 units. In conclusion, it can be noted from the points raised above that, any government intervention in the market whether through taxation or price control measures, directly affect the demand, supply and price of the commodity.