Microeconomics is the study of market behavior of individual firms and consumers. This study focuses on the process of decision making by individual firms and households. The factors that influence the buyer in making his or her buying decision and the seller’s response to it are deliberated in Microeconomics to infer patterns of specific supply and demand situations. This study helps to regulate market dynamics, viz. controls, pricing and supplies of particular products and services. This is economics at its grass root level where it deals with individuals that make up the larger economy. Research on Microeconomics raises two questions, viz. (1) why should be quantity control in the market and (2) what effect quantity control has on prices?
Quantity control is a measure enforced by government to control market dynamics. Under extraordinary circumstances government interferes in the market to regulate supplies formally. When demand exceeds supply, the market tends to be a seller’s one; when supply exceeds demand, it tends to be the other way round. Both these scenarios create disequilibrium in the market. In a seller’s market the buyer or the consumer ends up paying more and in a buyer’s market the seller ends up getting less for his goods. Both these scenarios are not conducive to a healthy economy. How can one avert this situation and bring about equilibrium in the market?
To some extent market control can be the answer. But in a controlled market the buyers face negative impact and the sellers the positive impact. Suppliers make maximized profits by selling their goods at the demand price than at the supply price. They take the role of price makers. The seller controls the market by setting price for his goods he wants to sell. Also he controls the price of merchandize the buyers want to buy. This leads to a situation where the society’s morale gets affected. Here, the consumers are left with no other choice but to buy goods at the prevailing market prices on which they have no control. To tide over such situations government steps into standardize the market with quantity and price controls (AmosWeb).
The affairs of the market are balanced and normalized by introducing measured market structures where no player has absolute market control except the government. The near perfect equilibrium is brought by quantity and price controls in the market with varying degrees. The required quantity of merchandize is supplied to the market that is directly proportional to the buying interest. This is a situation where neither surplus nor shortage of good exists. In other words, the demand-supply graph will be positively slopped. Quantity control to a great extent constitutes monopoly because there can be very few substitutes available in the market for competition. In this situation administered monopoly controls the market as entry barriers prevent substitutes from entering the market and avoid competition (Tools).
Government does quantity controls in the market for good economic reasons. This may be intended to regulate the quantum of goods that can be transacted to assure quality, availability and to maintain certain desired standards. Or it can be to introduce a quota system warranted by situations to limit the quantity of goods to be sold. When quantity controls are enforced, governments also oversee price controls to maintain equilibrium in the market. Generally, the administered price shall be in a range with lower and upper ceilings. Generally, the government’s intervention in the market is warranted by scarcity and shortages in goods and services caused by natural disasters like earthquakes, floods, conflicts such as war and other emergency situations.
Quantity controls are bound to have unwelcome results. It can lead to inefficiency. It can also deprive both the buyer and the seller the gains that they may derive from mutually beneficial transactions. There is also a lost element of missed opportunity in quantity control or quota system, which does not encourage the parity between demand price and supply price. It may be noted, there are many ways to restrict supplies apart from formal controls. Also, formal controls do not necessarily guarantee against shortages (GraddyEcon).
What effect quantity control has on consumers?
The laws of demand and supply clearly define principles of quantity and price. The law of demand describes that the price falls when the quantity increases. Conversely, when the quantity is controlled, the price automatically goes up. As demand supply relationship is intertwined, quantity controls in the market will adversely affect the consumer. Hence, under the quantity control regime the price is also controlled to the equilibrium level. The price is maintained at a level at which the quantity supplied equals the quantity demanded. But this is not a winsome situation either for the consumer or for the supplier because the consumer is always happy to pay less and the supplier always wants more for his goods.
Most governments have, in the past, intervened in their markets to introduce quantity and price controls either under humanitarian considerations or under political compulsions, knowing well that it is no pleasant task to administer markets. But they have been compelled to impose quantity and price ceilings during crisis situations like wars, crop failures and other natural disasters to protect the people from shortages of essentials. National disasters lead to spurt in prices that hurts people. World War II forced many countries, including the U.S. to enforce price ceilings on many goods and services (GraddyEcon, Price and Quality Controls).