Question

a. Distinguish between demand and quantity demanded. Do the same for supply and quantity supplied.

b. Distinguish price ceiling and price floor. List and discuss some of the problems associated with price floor and price ceiling. What are the major problems that will tend to arise if there are legal limits on the movement of prices? How do legal controls on prices lead to corruption?

Answer 1

Ans.
a) Demand for a good is determined by the non-price factors like price of realated goods, tates and preferences etc. while quantity demanded is determined by the own price of the good and this relation is negative.
Similarly, supply of a good is determined by the non price factors like price of the related good, government regulations etc. while quantity supplied is determined by the own price of the good and this realtion is positive.

b) Price ceiling is the government regulation which caps the maximum price the supplier can charge for a good. This creates a situation of excess demand in the market if the price ceiling is below the market clearing price.

Price floor is the government regulation wherein the price of the good cannot fall below a legal minimum. This creates a situation of excess supply in the market if price floor is above the market clearing price

This control over the movement of prices by price ceiling and floor leads to deadweight loss in the market i.e. the allocation of resources is not efficient when government controls the movement of prices. This can lead to corruption. Suppose the government places a price ceiling creating excess demand in the market then the supplier can adopt wrong mechanism to sell good to buyers willing to pay higher price of the good by taking bribes from them.

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