Market Equilibrium Applications

Can supply demand analysis be applied?

In this segment, we can comprehend how the supply demand analysis can be applied. Particularly, we can look at 2 instances of government involvement in the form of cost price control. Often, it becomes obligatory for the government to manage the cost prices of certain commodities and services when their cost prices are either too high or too low in comparison to the desired degrees. We will scrutinize these issues within the substructure of perfect competition to look at what influence these ordinances have on the market for these goods.

Price Ceiling

It is not very unusual to come across examples where government fixes a maximum permissible cost price for certain commodities. The government imposed upper limit on the cost price of a commodity or service is called price ceiling. Price ceiling is normally imposed on obligatory items like rice, wheat, sugar, kerosene and it is fixed below the market decided cost price since at the market decided cost price some segment of the population will not be able to afford these commodities.

Price Floor

For certain commodities and services, decrease in cost price below a particular degree is not desirable and hence the government sets floors or minimum prices for these commodities and services. The government imposed lower limit on the cost price that may be charged for a particular commodities or service is called price floor. Most well known instances of imposition of price floor are agricultural cost price support programmes and the minimum wage codification or legislation.

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