A market consists of two individuals; the buyers who are willing and able to purchase the goods and services and the sellers who are willing and able to distribute the goods and services. Therefore, supply and demand are two forces that makes the market economy work by determining the quantity of goods produced and supplied in the market and the price at which the goods will be sold (Mankiw, 2014). The buyers and sellers interact to drive the market economy by determining the market price and allocating the scarce resources efficiently. For example, a Coca-Cola company will try to get information about the market trend in the carbonated drink sector. The information they will get will help them make a decision about their price based on the operations of other suppliers and demand from consumers in the market.
Movement along the demand curve entails a change in both the price and quantity from one point to another. Similarly, movement along the supply curve involves a change in the price of good and the quantity supplied in accordance with the original supply relationship (Mankiw, 2014). A shift of the demand curve refers to a change of the original demand curve to a new position. Therefore, people will demand a different quantity at a given price. A shift in the supply curve refers to a change of the supply curve to a new position whereby the quantity supplied is affected by a factor other than price. A shift in the demand curve might be caused by taste and preferences while a shift in the supply curve might be caused by prices of other goods, taxes and subsidies, and technique of production.
Price ceilings and price floors create the following market inefficiencies. First, it creates deadweight loss in total surplus. It is because the quantity transacted is below the efficient market equilibrium. Second, it creates wasted resources. It causes people to spend their time and money in acquiring the scarce resources. Third, it creates black markets. It encourages people to do business outside legal markets so that they can bypass price restrictions. Fourth, it causes inefficiently low quantity. Since producers are unable to sell their goods unconstrained prices, they are encouraged to lower the quality of goods to reduce the cost. The government is the one that sets the prices. Therefore, this prevents the market from reaching the equilibrium and allocating efficient prices and quantity.
Price ceiling creates a shortage in the market in a situation when the government sets the price below the market equilibrium. In such case, the consumers are the ones who are affected since they will have to compete for the limited supply of the goods. Likewise, price floors will create excess supply if the government sets the price above the market price. The government will lose since it will pay exporters to sell the excess quantity at a loss overseas. Also, sellers will lose since they cannot find buyers.
The government still imposes price control measures because it benefits some people. Price ceiling benefits some influential buyers while price floors influence some influential sellers of a good. For example, the New York rent control rules affect most residents but benefits a small minority of renters by providing them with cheaper housing.
Mankiw, N. G. R. E. G. O. R. Y. (2014). Principles of macroeconomics. Cengage Learning.
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