MARKET EQUILIBRIUM AND GOVERNMENT INTERVENTION

MARKET EQUILIBRIUM

DEFINITION

The quantity in which producers are willing to produce and the consumers are willing and able to purchase.

 QUANTITY DEMANDED = QUANTITY SUPPLIED 

 

DETERMINATION OF EQUILIBRIUM PRICE AND QUANTITY

1. From demand and supply schedules
2.  From demand and supply curves

  
DEFINITION OF GOVERNMENT INTERVENTION
The imposition of certain directives by the government,which interferes with the market mechanism.

TYPES OF INTERVENTION

1. Price control(price floor or minimum price and price ceiling or maximum price)
2. Indirect tax and subsidy

PRICE CONTROL  
a)Minimum price(price floor)

• imposed by the government when market price is extremely low
• Where government help push up the price(agricultural products)
• At minimum price,supply exceeds demand:therefore,its creates SURPLUS. 

       

ADVANTAGES 
=Higher income for FARMERS 

DISADVANTAGES

1. Consumers have to pay higher price
2. The problem of surplus.Government has to buy the excess stock by using taxpayers money
3. The excess stock has to be disposed-causes wastage.

b)Maximum price(price ceiling)

• imposed by the government when market price is exorbitantly high
• usually imposed during inflation or war
• at maximum price,demand exceeds supply:therefore,it creates SHORTAGE.   

 



ADVANTAGES
Consumers pay lower price


DISADVANTAGES

1. Due to the problem of shortage,people are willing to pay higher price.This encourages black market and smuggling activities.
2. Since limited supply,government has to ratio or redistribute
3. Encourages exploitation by the producers.

    

 TAXES
 

DIRECT TAX

Imposed directly on to a person(income tax,company tax).

INDIRECT TAX

Imposed on an entity but that entity can shift the burden of paying tax to someone else(sales tax,import tax).

EFFECTS OF IMPOSING INDIRECT TAXES ON GOODS

 The imposition of indirect tax will cause the producer to reduce supply.Therefore,supply curve will shift to the left(Supply without tax -->Supply with tax). As a result,price goes up and quantity reduced.