Name: Ibrahim Niazi
Roll number: s2023-066
Assignment 3
Question no. 1
Part a
Suppose government establishes a price ceiling of $3 for corn. What might prompt the
government to establish this price ceiling? Carefully explain the the main effects.
Demonstrate your answer graphically.
The equilibrium price is found where the quantity supplied equals quantity demanded.
This occurs at price of 4$ where the quantly demanded is 6 and the quantity supplied is
6 too.
If government establishes a price ceiling of $3 (sellers cannot charge a price above $3)
here will be excess demand of 3 corns, as the demand is for 7 but only
4 are supplied.
Why Government establish Price ceiling:
The goverment might establish a price ceiling of $3 for corns in response to concerns
about affordability far consumers so they
all will be able to get this essential need.
Main effects:
Shortage:
If price ceiling is set below the equilibrium price
demand exceeds supply. This results in shortage.
Reduced Quantity supplied:
Farmers may reduce the quantity supplied because price ceiling may not cover the
production cost.
Black Market:
Due to shortage, a black market might emerge where corn is sold at prices higher than
celling leading towards Inefficient allocaton of resources and unfair distribution.
Part b
Next, Suppose that the government establishes a price Floor of $8 for corn. What will be
the main points of this price floor demostrate answer graphically?"
If the government establishes a price floor of $ 8. ( sellers cannot charge below this
price) 'It results in excess supply of 12 corns. as quantity demanded is a but supplied is
14.
Why government establish price floor:
Government might establish price Floor of $8 for corn to support farmers and ensure
that they receive a fair income for their production. For maintaining agriculturad
sustainability and preventing farmers from facing financial difficulties.
Main effects:
• Surplus:
If the price floor is set above the equilibrium price, it creates a situation where the
quantity supplied exceeds the quantity demanded.
• Potential for Government intervention:
To address the surplus, the government
may need to intervene by purchasing excess wheat implementing other measures to
stabilise market.
Figure:
Graph representing both shortage due to price ceiling and surplus because of price floor
Question no.2
Part a
Write any five terms you come accross. Do they belong micro - economics
or macroeconomics?
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CPI (Consumer Price Index)
Fiscal Policy
Stagflation
Wage - Price Spiral
Price celling and Price Floor
These terms belong to both macroeconomics and microeconomic as they are
involved in both macro level economy and individual economic system.
Part b
What is the purpose of price celling? why is it discouraged?
Purpose of Price Ceiling
Price ceilings are generally implemented
by the government to keep the product in an affordable range for consumers.
Why is it discouraged:
It has its own shortcomings as it gives rise to the instances of stocking, food shortage
etc. The sellers starts to control the supply creating artificial Shortage to keep the
market in their favour. Hence, creating economic imbalance.
Part c
A statement in article reports "…...te escalate supply to match demand in an attempt to
control overall inflation in Pakistan, agri production must be increased." what problem
does the statment highlights? What short term solution do you think government is
adhering to solve this problem?
Problem highlighted in the statement:
Though Pakistan is an agrarian economy,
but still half of the country's land has been urbanised.
Solutions government are adhering;
Government opted for contractionary fiscal palicy and high interest rates to dampen
demand, Techniques like multi - layer Farming , bioflac etc can play a pertinent role in
increasing supply that will partly act as a saviour against the devil of inflation the
country is possessed with right now.