Government Intervention and Equilibrium Price
Case Assignment
- In some cases, the government can intervene in the market when the equilibrium price is too high or low. For example, a price ceiling is a legal maximum price that can be charged in a particular market. Do some research on your own. Here are some sites to help you get started:What Happens to the Equilibrium Price When Quantity of Supply & demand Shifts Upward? Chirantan Basu, 2018. Retrieved from https://tinyurl.com/y8qz8v8o (https://smallbusiness.chron.com/happens-equilibrium-price-quantity-supply-demand-shifts-upward-36644.html)Price ceilings and price floors: how does quantity demanded react to artificial constraints on process? Khan Academy. https://tinyurl.com/yaxj34ym (https://www.khanacademy.org/economics-finance-domain/ap-microeconomics/ap-supply-demand-equilibrium/ap-deadweight-loss-tutorial/a/price-ceilings-and-price-floors-cnx)
- An art museum raises its admission price, and ends up with a decrease in its total revenue. How could you explain this situation to the museum director?
- Suppose Billy drinks two cups of coffee a day no matter what the price. What does this mean in terms of supply and demand equilibrium?
- What are the main determinants of equilibrium of demand and supply? Which is likely to have more of an impact on supply and therefore market equilibrium: the demand for orange juice or the demand for a particular brand of orange juice?
After reading the materials from the Background page and other sources you found on your own, address the above questions in an essay or short-answer form:
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In certain situations, the government may choose to intervene in the market to ensure that prices are not too high or too low, thereby maintaining a balance between supply and demand. One way in which the government can intervene is by implementing price ceilings, which establish legal maximum prices for goods and services in a specific market. This measure is intended to protect consumers from excessive prices and to ensure affordability of essential products.
When a price ceiling is set below the equilibrium price, it has significant effects on the market. Firstly, it creates a shortage of the product, as the quantity demanded at the price ceiling exceeds the quantity supplied by producers at that price. As a result, consumers demand more of the good than producers are willing to supply. This imbalance between supply and demand leads to excess demand or a shortage in the market.
In the case of an art museum that raises its admission price and experiences a decrease in total revenue, the phenomenon can be explained using the concept of price elasticity of demand. If the demand for museum admission is highly elastic, a price increase will lead to a proportionally larger decrease in the quantity demanded. This results in a decrease in total revenue for the museum. Besides, if the demand is inelastic, the decrease in quantity demanded will be relatively smaller, and the museum might still benefit from the price increase through higher total revenue.
The scenario with Billy, who drinks two cups of coffee a day regardless of the price, illustrates a perfectly inelastic demand. In this case, the price of coffee has no effect on the quantity demanded by Billy. This means that even if the price of coffee rises or falls, Billy will continue to consume two cups of coffee daily. In terms of supply and demand equilibrium, Billy’s fixed demand does not influence the equilibrium price or quantity in the market. The equilibrium price is determined by the behavior of other consumers and producers in the coffee market.
The main determinants of equilibrium in demand and supply are factors that affect the quantity demanded and the quantity supplied at various price levels. For demand, these determinants include consumer preferences, income levels, the prices of related goods (substitutes and complements), population changes, and expectations about the future. For supply, determinants include input costs, technological advancements, government regulations, and expec
