Question

Recognize how changes in supply and demand affect market outcomes and explain the effect of government regulation on prices?

Use your own words and be sure to support your statements with logic and arguments. Post your comments.

Answer 1

Demand is the quantity of goods that all the consumers ask for and supply is the quantity of goods that all the sellers are willing to sell. Both of these phenomenons of demand and supply are given at a specific price for specific duration of time.
There could be some changes that could occur to both demand and supply and reasons for it could be various; like change in prices, change in prices of substitute goods or complimentary goods, changes in taste and preferences of consumers.

There is a state of equlibrium where market demand = market supply at a given price.

When prices of a commodity decrease, it's demand increases, as demand and price have an inverse relationship but supply decreases, as supply and price has direct or positive relationship. When prices of a good increases, demand decreases and it's supply on the other hand increases.

When demand increases, it causes equilibrium price and quantity to rise, but, when demand falls, equilibrium also falls.

When supply increases, equilibrium falls. But, when supply falls down, equilibrium increases.

Government can impose two types of restrictions on the price, that is price ceiling (maximum price) or the price floor (minimum price).

Price ceiling sets the maximum price that can be set by the seller. Usually price ceiling is set by the government below the equlibrium price and as a result, quantity demanded increases and quantity supplied decreases. This result either in shortage of supply or excess demand.

Price floor sets the minimum price that a seller should charge. It is usually set above the equlibrium price by the government. As a result of this, quantity supplied increases and quantity demanded falls down. The situation of excess supply or surplus will be faced by the country.