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

Change in supply and demand affect equilibrium price as well as equilibrium quantity. I will further explaing few scenarios below:

Rightward shift in demand raise price level from Y to P1 and output level from Y to Y1.

Leftward shift in demand redice price level from Y to P1 and output level from Y to Y1.

Rightward shift in supply reduce price level from Y to P1 and raise output level from Y to Y1.

Leftward shift in demand raise price level from Y to P1 and reduce output level from Y to Y1.

Government Regulation of prices are:

Price ceiling: It is imposed below the equilibrium price. At this price level, quantity demanded > quantity supplied which result in shortage of goods.

Price floor: It is imposed above the equilibrium price. At this price level, quantity demanded < quantity supplied which result in surplus of goods.

Tax: Equilibrium price in below market is Pe. Tax imposed by government raise price paid by consumer and reduce price received by producer which reduce equilibrium quantity from Qe to Qt.