Role of Government in Determination of Price and Quantity — Flashcards

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Equilibrium price is the price determined purely by the forces of demand and supply, without any government intervention. It is the natural market price when buyers and sellers interact freely.

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The government fixes some prices below equilibrium price to protect consumers when there is shortage and the price becomes too high. This helps poor and needy buyers afford essential goods.

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Control price is the maximum price fixed by the government, generally lower than the equilibrium price, to protect the interest of consumers. It is also called ceiling price. Essential goods like whea…

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Control price below equilibrium price creates excess demand because buyers want more than sellers are willing to sell. This can lead to rationing and black marketing.

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Rationing means fixing a quota per head per unit of time. It is used when there is excess demand at the control price so that the limited supply can be distributed fairly.

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Black marketing is a situation in which the seller illegally charges a price much higher than the control price. It may occur when there is excess demand at ceiling price.

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Dual price policy is used to reduce shortage and black marketing. Under this policy, part of the commodity is sold at control price through fair price shops and the remaining part is sold at market pr…

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Support price is the minimum price fixed by the government, generally higher than the equilibrium price, to protect the interests of producers, especially farmers. It assures farmers of a minimum sale…