CHAPTER 5
Sources of an increase in demand:
1.
2.
3.
4.
An increase in the price of a substitute product
An increase in the consumer’s income
A greater consumer preference for the product
An expected increase in the price for the product
Sources of the decrease in demand:
1.
2.
3.
4.
A fall in the price of the substitute product
A fall in the consumer’s income
A reduced preference for the product
An expected fall in the price of the product
Sources of an increase in supply:
1. A fall in the price of an alternative product or a rise in the price of a joint product
2. A reduction in the price of any of the factors of production or other inputs (i.e. a decrease in the cost of
production)
3. An improvement in the productivity of the factors of production (e.g. as a result of technological progress)
this also lowers the cost of production
Sources of the decrease in supply:
1. An increase in the price of an alternative product or a fall in the price of a joint product
2. An increase in the price of any of the factors of production or other inputs (i.e. an increase in the cost of
production)
3. A deterioration in the productivity of the factors of production (which also raises the cost of production)
Forms of government intervention:
1.
2.
3.
4.
Setting maximum prices (price ceilings)
Setting minimum prices (price floors)
Subsidising certain products or activities
Taxing certain products or activities
Maximum prices: price ceilings, price control
Minimum prices: price supports, price floors
Why governments set maximum prices:
1.
2.
3.
4.
To keep the prices of basic foodstuffs low, as part of a policy to assist the poor
To avoid the exploitation of consumers by producers, that is, to avoid “unfair” prices
To combat inflation
To limit the production of certain goods and services (e.g. in wartime)
Ways in which excess demand can be allocated between consumers:
1. Consumers may be served on a “first come, first served” basis, resulting in queues or waiting lists
2. Suppliers may set up informal rationing systems (e.g. by limiting the quantity sold to each consumer by
selling to regular customers only)
3. Government may introduce an official rationing system by issuing ration tickets or coupons which have to be
submitted when purchasing the product
Ways in which the government can get rid of a market surplus because of the fixing of a minimum price above the
equilibrium price:
1. Government purchases the surplus and exports it
2. Government purchases the surplus and stores it (provided the product is non-perishable)
3. Government introduces production quotas to limit the quantity supplied to the quantity demanded at the
minimum price
Why setting minimum prices above equilibrium prices is inefficient in assisting small or poorer producers:
1.
2.
3.
4.
All consumers, including poor households, have to pay artificially high prices
The bulk of the benefit accrues to large producers or concerns owned by big companies
Inefficient producers are protected and manage to survive
The disposal of the market surpluses usually entails further cost to taxpayers and welfare losses to society
Black markets: occur in any situation where the market forces of supply and demand can’t (or are not allowed to)
eliminate excess demand.