Market machanisum
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This document discusses market equilibrium and the impact of government intervention in markets. It defines market equilibrium as the price where quantity demanded equals quantity supplied. The document discusses how equilibrium changes with shifts in supply or demand. It also explains different types of government intervention like price controls, taxes, and subsidies. Specific policies discussed include price ceilings, price floors, and minimum wages. The effects of binding versus non-binding price controls are explained, such as shortages from price ceilings and surpluses from price floors. The document concludes by asking if price controls are good policy tools.
Market machanisum
- 1. Market Mechanism Dadhi Adhikari Kathmandu College of Management 5th Sept,07
- 3. Equilibrium (cont…) . S D P Quantity Price Excess Supply (Surplus) P1 Excess Demand (Shortage) P2
- 4. Change in Equilibrium 1.Change in Demand Both quantity and Price increase when demand curve shifts outward 2.Change in Supply Price decreases and Quantity increases when supply curve shifts outward
- 5. Change in Equilibrium 3. Change in both demand and supply P Q1 Q2
- 6. Effect of Govt. Intervention • Above mentioned mechanism of attaining equilibrium is possible in perfectly competitive market. • Perfectly competitive market is not realized in our daily life. • So there is need of government intervention to try to achieve the perfectly competitive output.
- 7. Effect of Govt. Intervention • Government can intervene market in various ways. For example – Tax, subsidies – Price control – Output control
- 8. Controls on Prices • Price Ceiling- Maximum price that can be charged • Price Floor- Minimum price
- 9. Effect of Price Ceiling . D S Price Ceiling P P’ Non-binding price ceiling D S P P’ Price Ceiling Binding price ceiling QQ PP
- 10. Effect of Price Ceiling (cont….) • Nonbinding price ceiling has no effect • But due to binding price ceiling - Either queue - Or discrimination - There is rationing
- 11. Effect of Price ceiling (cont..) • Rent control D S Price Ceiling P P’ Short Run D S P P’ Price Ceiling Long Run QQ PP Shortage
- 12. Effect of Price Floor D S Price Floor P P’ Binding price floor D S P P’ Price Floor Non-binding price floor QQ PP Surplus
- 13. Minimum Wage D S Min. Wage W W’ Binding price floor D S W Free Market floor LQ WW
- 14. Effect of Price Floor (cont…) • Due to minimum wage mostly unskilled and inexperienced labor are affected • Unemployment is the outcome • Question: Is price control good?
- 15. Question for Practice The market for tickets to the cricket match between Sri Lanka and India can be described by the following demand and supply equation a. Solve for the equilibrium price and quantity. b. Lovers of cricket persuade government to impose a price ceiling of Rs 40 per ticket. How many tickets are sold in the market? c. Explain the possible impact of this price ceiling. PQ PQ d S 9020000 11010000 −= +=