8.4 Price Control
A price control is an artificial process of setting ceiling upon a product to determine what the maximum price can be. Sometimes, it is done as a matter of consumer protection. On the other hand, it may be an effort in a command economy to exercise control over market.
In free market economy, price is determined by the interaction of demand and supply. Some times, these forces are not allowed to work on their own for some goods instead, government use to established either price ceilings, which are prices above the market clearing or equilibrium price to buy or sell, or price floors, which are prices below to buy or sell.
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The equilibrium price or market clearing price is at Pe with quantity demanded Qe. If a price ceiling is fixed below the equilibrium price, at P1 in figure 8.1, the equilibrium price Pe becomes illegal. At the ceiling price, buyers want to buy more than sellers will make available. In the figure 8.1, buyers would like to buy amount Q2 at price P1, but sellers will sell only Q1. Buyers cannot buy much as want because the supply cannot meet their demand. Buyers are faced with the problem that they want to buy more than is available in the market. On the other hand, laws are use to establish minimum price of commodities which other wise known as price floors. |
