Question

3. Discuss the supply conditions that must be present for price gouging to take place. 4. What is the impact, if any, of price gouging on the following entities: a. Consumers of goods and services b. Small firms that have no control on pricing C. Large and medium sized firms

Answer 1

Answer:

3. Price gouging is charging unusually high and unreasonable prices for goods and services. It is common during natural calamities. Price gouging takes place either due to decrease in supply or increase in demand. The decrease in supply may be due to ruin of infrastructure such as transport system or agricultural loss. The supply curve in the short run is considered inelastic. Hence, the retailors charge very high prices for the existing stock of goods.

4.The impact of price gouging on

a. Consumers are worse off because they have to pay very high prices for goods and services. Thus consumer surplus decreases. However, good thing is that the consumer gets goods who value them the most. Thus it ensures economic efficiency.

b. Small firms generally have no excess capacity of production. Also price gouging is a short term phenomena. In short run small firms can not increase supply even at higher prices because short run supply is inelastic. Hence small firms do not benefit much from price gouging.

c. Big and medium sized firms have excess capacity that can be used to produce more even in short run. Hence, they benefit the most from price gouging.