Question

4. Evaluate the following statements using what you know about economics.

            A) In an effort to control rising prices in the 1970s, many governments adopted price controls, fixing the prices        (and wages) for extended periods of time and thereby causing shortages of some goods and surpluses of others. Evaluate the following statement. “Shortages are a disadvantage of price controls, but the surpluses are    advantages that offset the disadvantages.”

            B) According to political journalist Michael Kinsley, “The price of oil shoots up; we start using less; reduced demand sends the price down; we start using more; pretty soon it's shooting up again.” Explain whether you agree         or disagree with Kinsley's assessment of oil markets.

Answer 1

A) Now price fixing or price ceiling is the level of price set below equilibrium . For price controls measures to be successful it must be set below equilibrium . In such cases the quantity demanded rises and quantity supplied falls . This causes a shortage of goods in the market . This is the case for normal goods when wages are fixed . But if a good is inferior , then a fall in price may induce consumers to buy same amount or lesser of that inferior good and invest the money saved in other goods . Also if wages are not allowed to rise then that will have an adverse effect on demand even if price falls .

So here we can see that shortages will be created in every normal good market , surplus may be created in other markets . So the amount of surpluses is not expected to be high enough to offset the disadvantage of shortages .

B) The statement is true . When price rise , quantity demanded falls ( ceteris paribus ) . If demand falls to such a level that there is excess in the market or the market is not cleared then price will come down . When prices comes down again quantity demanded rises .