Question

1.1 With aid of diagrams and suitable examples discuss the economic effects of price controls.
1.2 With the aid of relevant examples distinguish between administered prices and price controls.

Answer 1

1.1) Let us put our focus on the economic effects of price controls. Fist of all price control is when the government keeps a floor price in order to prevent a further fall in the price or it may keep a price ceiling so as to see that the price is not rising beyond the set price.

For example, sometimes the business people try to create artificial shortages of goods to raise prices of the goods. So by keeping the price of the goods tapped at a certain level the government may help common man like us from being exploited. In such a case the government imposes a price ceiling. In this case the sellers lose as they could get more profits if they could sell their goods at a price fixed by them. Even in case of consumers too some who cannot afford to buy the good lose while those who can afford are at a gain. It leads to cases of black marketing, first come first served and under the counter transactions.

In case of price floor many a times what happens is the government puts a price below which the prices cannot fall. For example in times of over production of potatoes, in order to prevent the farmers from selling the potatoes at an extraordinary low rates the government fixes a minimum price below which the potatoes cannot be sold in order to protect the interest of the farmers. In such a case due to over production of stocks black marketing does not occur but producers sometimes sell their stock at a price below the floor price secretly.

The diagram of both are given below:

NOW

PAGE: DATE: 900 800 100 600 5ए । Price ceiling Poue 200 Euce cazand I or shalage from prite Güling i or is in 12 is in is if it is iq do bi 22 23 24 Quantity ( thousands) Izeer supply or Sur plus Price floor set here Price Quantity

1.2) Administered prices are prices set by an institution. These prices are not set by free forces of market demand and supply. Examples of administered prices is when a government charges a price of gasoline to be charged from the consumers.Price controls are prices set by consumers looking at the various demand and supply of products. It includes price control and price ceiling. Like if the supply of tomato is too much the government may fix a minimum price so that the farmers are not exploited to sell at a very low price.