Question

Assume the government sets the price for a good below market equilibrium. Briefly explain what will happen to demand and supply and what kind of factors will determine the discrepancy between them. How will it affect the prices of substitutes? () *Use diagrams where relevant

Answer 1

If government sets the price for a good below market equilibrium,then the cost of commodities will be decreased in the market making the goods available in more cheaper rates.This will enhance the demand of goods from the consumers but supply will not increase in the market , creating shortage of goods in the market.
Factors determine the discrepancy between demand and supply
1.Price fluctuations- Increase and decrease in the prices of goods are the strong factors that determine change in demand and supply.
2. Seasons- Seasons play an important role .For example- during winters, demand for woolen clothes will increase and vice-versa.Supply of woolen clothes in the market will be increased ,as due to high demand prices of woolen clothes will be increased.
3.Changes in income-Changes in the level of income affect demand and supply.For example- if a person's income rises ,he will demand more of goods but if his income decreases ,he won't be demanding for the goods.