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Free «Macroeconomics» Essay Sample

Normally, prices in the market are determined by the market forces of demand and supply in certain special instances and market various business stakeholders call upon the government to intervene and institute some restrictions or control; this is what is referred to as price control. Normally there are two types of price control, namely price floor and price ceiling. Price Floor-Governments, in this situation impose a minimum limit which no price is allowed to fall beyond and is usually set above the equilibrium price

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 Since a price floor is set above the equilibrium price it leads to a surplus of the commodity shown as (W2 - W1). Suppliers are enticed by the high price offered since they were willing to take a lesser price for the same quantity hence increased supply. On the other hand, though income of people is rising they spend less and less resulting in a surplus. They fulfill their intention of boosting and stabilizing incomes especially in the agricultural sector where price floors are dominant due to its fluctuating nature.  Negatively though is that consumers end up paying highly for goods they would have otherwise bought cheaply.  A big sum of money has to be allocated by the governments who have to spend and support these programs. This affects levels of spending at the expense of other feasible and pressing needs.

Price Ceiling

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This is the other aspect of control referring to instances when a government imposes a roof on prices to the buyers favor, in turn restricting movement of price above the set limit.

Since the price is set below the equilibrium price it makes goods cheaper for the consumer resulting in a demand that outstrips supply. This causes a shortage (A2A1) since suppliers aren’t willing to supply at that price. Goods exchanged are not entirely determined by price necessitating other ways of arriving at rationalized status. Normally consumers are willing and able to pay higher than the price PB higher than that set leading to “backdoor” payments normally referred to as black markets. Price ceiling are mostly witnessed in the rent regulation and positively cushions consumers against high prices making the affordable to low and middle income earners.

 
 
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Ironically though it can be noted that apart from distorting prices, creating imbalances and favoring some quarters all forms of price control end up hurting the very people they are intended to protect. They also involve costs to the government of enforcing and monitoring the restrictions. Minimum wage is one is an example of a price floor given that it imposes a lowest wage level that a firm can pay its workers and it cannot pay below such a limit. Normally, this leads to unemployment since workers get laid off. On the other hand New York's Rent Control is a price ceiling since the government dictates a rent level which house owners cannot charge beyond. Normally this situation leads to house shortage since owners withhold from letting apartments.

The effect of a third-party-payer system on equilibrium price and quantity

Under this system, the consumer choose the amount to purchase doesn’t pay the cost the purchased goods in their entirety. In a third-party-payer market, the person receiving the good differs from the person paying for them. The prominent effect of this system is that the equilibrium quantity and total money spent may be much higher and goods in this system are normally rationalized through means that are largely social and/or political.

   

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