SUPPLY, DEMAND AND GOVT.

POLICIES

PRICE CONTROL:
There are two things in this topic which can be discussed.
1. Price Ceiling
2. Price Flooring

Price Ceiling:
A legal maximum on the price at which a good can sell. That maximum
price which govt. has decided at which will not be exceeded is called
“Price Ceiling”.

Explanation:

In this diagram, the dashed line represents

the definition of price ceiling. In the diagram,
the dashed line shows that Govt. imposed
the maximum price above the market
equilibrium price that has no measurable
affect on producer’s price. In this case,
market is unable to produce as high as
ceiling price.
There is another thing in the diagram that
shows the solid line of price ceiling below the
market equilibrium price. But in this case,
shortage of supply occurs which may lead to
Black Market. Suppliers can no longer charge
the price the market demands but are forced to meet the maximum price
set by the government's price ceiling.

Price Flooring:
A legal minimum on the price at which a good can be sold. The minimum
price which govt. has decided and on which will not be exceeded from the
limit is called “Price Flooring” the price is always decided when the supply
and demand and intersect at a particular point.

Explanation:
The dashed line represents the price floor
imposed by the Govt. but has no
measurable affect. In this, producers are
already producing high price.
A different thing here is the line above the
equilibrium point which shows the surplus
of supply which may lead to low demand.
Supplier can’t charge the price the market
demands but are forced to raise minimum
price set by Govt. price floor.

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TAX
Tax incidence:
The study of who bares the burden of taxation is called tax incidence.

Explanation:
The Govt. actually imposes different types of taxes on people to get
revenue. These are in form of Sales Tax, Advance Sales Tax, Duty e.g.
Govt. levies taxes for the betterment of the people and to meet the needs
of the country. Usually the producers add the tax when adjusting the
price of a product. By this, common people have to pay the tax.
It contains two things.
1. Buyer’s Affect
2. Seller Affect

Buyer’s Affect:

Explanation Of Graph:

Buyer's Affect deals with the affect that will occur on the customer of that
particular product with the increase or decrease in the price. We can see
the above graph that supply and demand curve are intersecting each
other on the price $3 with no tax added in the price of the product by the
Govt. But when the Govt. added TAX in the price, i.e. $0.50, as
mentioned above, the Demand curve shifted from D1 to D2. It clearly
shows the difference of $0.50. It results that addition of TAX, the demand
curve decreased as now the price is not suitable for the consumers. So
this idea is known as “Buyer's Affect.”

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Seller’s Affect:

Explanation Of Graph:

Seller's Affect deals with the affect that will occur on the Supplier or
Producer of any product with the increase or decrease in the price.
If we move our eye ball on the Graph above, Supply and demand curves
are intersecting each other on $3 with no any kind of tax added in the
price of the product. But when the Govt. added Tax in the price of this
product i.e. $0.50, as mentioned above, the Supply curve shifted from S1
TO S2. Now here is the difference of $0.50. Now the Govt. decided price
is 3.30$ which is the Equilibrium Price WITH TAX. As a result now the
Supplier is selling its product at the price of 3.30$. This is known as
“Seller's Affect.”

CONSUMER SURPLUS
Definition:
1. It means that the maximum amount that a buyer pay for a good.
2. A buyer’s willingness to pay minus the amount the buyer actually
pays.
Explanation:

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It can be said that whatever the price of a product or commodity, what
the actually buyers want to pay or willing to pay to buy the product. It
can be easily understand by Table.

Table:
Buyer Willing To Pay
John $100
Paul $80
George $70
Ringo $50

Explanation:
Now we will explain the above table. In this table, we observe that the
highest willing to pay is of John which is $100. From that point, when we
move our eye ball to the bottom side of the table, we see that the willing
to pay is decreasing. Suppose there’s a product “X” and bid starts from
$20. Now the entire buyers are willing to buy the product. Now bid will
increase. Because product is single and can only be sold to single person.
Now the bid comes to $50. At this price, still all the buyers are willing but
Ringo is not willing to pay more than $50. Now there are only three
buyers who are willing to buy the product. Bid comes to $75. At this
stage, the power of willing to pay of George has exceeded. At the time,
bid stops at $80. Paul is willing to pay the product at $80. But still john is
willing to pay $100 for the product but the final price is $80. From this,
we can say that John saves $20. Because he’s willing to pay $100 but he
paid only $80. This is the concept of consumer surplus. Here we can say
that “A buyer’s willingness to pay minus the amount the buyer
actually pays.”

Using Demand Curve To Measure Consumer Surplus

First we’ll make the table which can be plotted on the graph.

Price ($) Buyers Q. Demanded

More than 100 None 0
80-100 John 1
70-80 John, Paul 2
50-70 John, Paul, George 3
50 or less John, Paul, George, Ringo 4

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Graph:

The shaded part of the graph shows “Consumer Surplus”

PRODUCER SURPLUS
First of all we will learn what is cost?
It means that the producer produces 1000 shirt. Now to producer 1000
shirts suppose he need 10000 to invest on shirts. That 10,000 is the cost
which he required to made 1,000 shirts.

Definition Of Producer Surplus:

• The producer surplus is the amount that producer’s benefit by
selling at a market price that is higher than they would be willing to
sell.
• The amount a seller is paid for a good minus the seller’s cost.

Explanation:
To understand the producer surplus concept, we need to demonstrate it
by the help of table and the graph.

Seller Cost ($)

Marry $900
Louise $800
Georgia $600
Grandma $500
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Now on the above table you can see the different cost of the different
sellers who are willing to sell their services to the customer. We can
observe that the cost of Marry is $900 and the lowest cost is of Grandma
which is $500. But keep in mind that it is not the price offered by the
customer. It is the cost that the sellers are going to bare. Suppose all the
sellers are willing to paint the house with different costs. As everyone
wants to have more in less price. So we’ll go for Grandma. She will be
given $600 to paint the house and $100 would be the “Producer’ Surplus”
of Grandma.

It will be like:

$600 – 500 = $100

$600 = Paid To Grandma

$500 = Cost Of Grandma
$100 = Producer Surplus

Price ($) Seller Q. Demanded

900 or more Marry, Louise, Georgia, 4
Grandma
800-900 Marry, Louise, Georgia 3
600-800 Marry, Louise 2
500-600 Marry 1
Less than 500 None 0

Graph:

* Please ignore errors if you find any.

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MARKET EFFIECENCY
There are two basic tools of Market Efficiency which have been discussed
on above pages. These tools are
1. Consumer Surplus
2. Producer Surplus

Market efficiency means “Welfare for both seller and buyer”. There is an
analyzing system made by economists which is called “Benevolent Social
Planner”.

There is a term which is called “Total Surplus” which can be find by

subtracting consumer surplus and producer surplus.

Consumer Surplus = Willingness To Pay – Amount Paid

Producer Surplus = Amount Received By Seller – Cost Of Seller

So…

Total Surplus = Willingness To Pay – Cost Of Seller

Consumer and Producer Surplus When Combined:

The above diagram shows the combination between consumer surplus

and producer surplus. By joining both of them, the curves are like given
above. In this case, both the parties are satisfied and the market become
efficient which is very important for smooth economic system.

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MARKET FAILURE
Market failure is a term used by economists to describe the condition
where the allocation of goods and services by a market is not efficient.
Market failure can be viewed as a scenario in which individuals' pursuit of
self-interest leads to bad results for society as a whole. The first known
use of the term by economists was in 1958, but the concept has been
traced back to the Victorian philosopher Henry Sedgwick. The belief that
markets can fail is a common mainstream justification for government
intervention in free markets. Economists, especially micro economists,
use many different models and theorems to analyze the causes of market
failure, and possible means to correct such a failure when it occurs. Such
analysis plays an important role in many types of public policy decisions
and studies. However, not all economists believe that market failures
occur, or that they are compelling arguments for government
intervention, due to government failure.

Examples:

Traffic congestion is considered an example of market failure: driving can

impose hidden costs on other drivers and society, whereas use of public
transportation or other ways of avoiding driving would be more beneficial
to society as a whole. Other common examples of market failure include
environmental problems such as pollution or overexploitation of natural
resources.[1] Nevertheless, some economists see these as symptoms of
public property rather than free markets.

MARKET FAILURE GRAPH

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