Question

Note: Use your own words and be sure to support your statements with logic and arguments.

Question:

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

Answer 1

Changes in the supply and demand can affect market outcomes because the supply and demand forces determined the market equilibrium price and quantity. For a particular product or a service the demand function is downward sloping and the supply function is upward sloping. Their interaction determine the equilibrium in the market at which the quantity supplied is equal to the quantity demanded. Changes in supply and demand basically indicate a shift in the supply curve and / or the demand curve. Suppose that the supply curve is unchanged but the demand curve shifts. If the demand is increased and the demand curve is a shifted out both the equilibrium price and the equilibrium quantity will increase. In contrast if it is decreased then both equilibrium price and quantity will decrease. As against if the demand is fixed but the supply is shifted to the right, price level decreases and the quantity increases. In contrast if the supply curve is shifted to the left then the price level increases and the quantity decreases. In this manner changes in the supply and demand can affect the market equilibrium price and quantity

Government regulation on price comes in the form of price floor in which a minimum limit is imposed on the market price and price ceiling in which a maximum limit is imposed on the market price. In case of a price floor the market experiences a surplus of production while in case of a price ceiling in the market experiences a shortage.