Page 1
Applications Of Demand And Supply
Institute of Lifelong Learning, University of Delhi
Subject: Microeconomics
Lesson: Applications Of Demand And Supply
Lesson Developer: Supriti Mishra
College/Department: Shyam Lal College, University of Delhi
Page 2
Applications Of Demand And Supply
Institute of Lifelong Learning, University of Delhi
Subject: Microeconomics
Lesson: Applications Of Demand And Supply
Lesson Developer: Supriti Mishra
College/Department: Shyam Lal College, University of Delhi
Applications Of Demand And Supply
Institute of Lifelong Learning, University of Delhi
CHAPTER PLAN:
1. Learning outcomes
2. Introduction
3. Government Intervention in Market
4. Price Ceiling
4.1 Binding and non-binding price ceiling
4.2 Consequences of binding price ceiling
5. Rent Control
6. Price Floor
6.1 Binding versus non-binding price floor
6.2 Consequences of binding price floor
7. Minimum Wage Legislation
8. Tax Incidence
9. Consumer and Producer Surplus
10. Market Efficiency
11. Summary
12. Exercise
13. Glossary
14. References
Page 3
Applications Of Demand And Supply
Institute of Lifelong Learning, University of Delhi
Subject: Microeconomics
Lesson: Applications Of Demand And Supply
Lesson Developer: Supriti Mishra
College/Department: Shyam Lal College, University of Delhi
Applications Of Demand And Supply
Institute of Lifelong Learning, University of Delhi
CHAPTER PLAN:
1. Learning outcomes
2. Introduction
3. Government Intervention in Market
4. Price Ceiling
4.1 Binding and non-binding price ceiling
4.2 Consequences of binding price ceiling
5. Rent Control
6. Price Floor
6.1 Binding versus non-binding price floor
6.2 Consequences of binding price floor
7. Minimum Wage Legislation
8. Tax Incidence
9. Consumer and Producer Surplus
10. Market Efficiency
11. Summary
12. Exercise
13. Glossary
14. References
Applications Of Demand And Supply
Institute of Lifelong Learning, University of Delhi
15. Quiz
Page 4
Applications Of Demand And Supply
Institute of Lifelong Learning, University of Delhi
Subject: Microeconomics
Lesson: Applications Of Demand And Supply
Lesson Developer: Supriti Mishra
College/Department: Shyam Lal College, University of Delhi
Applications Of Demand And Supply
Institute of Lifelong Learning, University of Delhi
CHAPTER PLAN:
1. Learning outcomes
2. Introduction
3. Government Intervention in Market
4. Price Ceiling
4.1 Binding and non-binding price ceiling
4.2 Consequences of binding price ceiling
5. Rent Control
6. Price Floor
6.1 Binding versus non-binding price floor
6.2 Consequences of binding price floor
7. Minimum Wage Legislation
8. Tax Incidence
9. Consumer and Producer Surplus
10. Market Efficiency
11. Summary
12. Exercise
13. Glossary
14. References
Applications Of Demand And Supply
Institute of Lifelong Learning, University of Delhi
15. Quiz
Applications Of Demand And Supply
Institute of Lifelong Learning, University of Delhi
1. Learning Outcomes
After you have read this chapter, you should be able to
. describe the operation of demand and supply forces in the real market.
. understand the need of government intervention to fix prices.
. recognize the price ceilings and price floors affecting market outcomes.
. explain the consequences of price control.
. analyze the effect of taxes on market outcomes.
. apply the knowledge of consumer surplus and producer surplus
. relate market efficiency to welfare.
2. Introduction
In theory, the price mechanism is evolved through the operation of the demand and supply forces.
In other words, the interaction between the demand and supply forces leads to fixation of the
price. The demand side comprised of buyers as agents whereas supply side comprised of sellers as
suppliers of goods. But in the real world, things work differently. For example, surplus stock is
available with the sellers but with no buyers. On the other hand, consumers find it difficult to get
sufficient supply of goods. In such situation where price mechanism fails to maximise the position
of buyers and sellers, the government have no option but to intervene. The intervention can be of
different kinds and have multiple effects on both buyers and sellers.
3. Government Intervention in Market
When the set of two agents, viz, buyers and sellers, fail to restore equilibrium in the commodity
market, we have to call for the services of the third agent, i.e, government to resolve the problem.
Page 5
Applications Of Demand And Supply
Institute of Lifelong Learning, University of Delhi
Subject: Microeconomics
Lesson: Applications Of Demand And Supply
Lesson Developer: Supriti Mishra
College/Department: Shyam Lal College, University of Delhi
Applications Of Demand And Supply
Institute of Lifelong Learning, University of Delhi
CHAPTER PLAN:
1. Learning outcomes
2. Introduction
3. Government Intervention in Market
4. Price Ceiling
4.1 Binding and non-binding price ceiling
4.2 Consequences of binding price ceiling
5. Rent Control
6. Price Floor
6.1 Binding versus non-binding price floor
6.2 Consequences of binding price floor
7. Minimum Wage Legislation
8. Tax Incidence
9. Consumer and Producer Surplus
10. Market Efficiency
11. Summary
12. Exercise
13. Glossary
14. References
Applications Of Demand And Supply
Institute of Lifelong Learning, University of Delhi
15. Quiz
Applications Of Demand And Supply
Institute of Lifelong Learning, University of Delhi
1. Learning Outcomes
After you have read this chapter, you should be able to
. describe the operation of demand and supply forces in the real market.
. understand the need of government intervention to fix prices.
. recognize the price ceilings and price floors affecting market outcomes.
. explain the consequences of price control.
. analyze the effect of taxes on market outcomes.
. apply the knowledge of consumer surplus and producer surplus
. relate market efficiency to welfare.
2. Introduction
In theory, the price mechanism is evolved through the operation of the demand and supply forces.
In other words, the interaction between the demand and supply forces leads to fixation of the
price. The demand side comprised of buyers as agents whereas supply side comprised of sellers as
suppliers of goods. But in the real world, things work differently. For example, surplus stock is
available with the sellers but with no buyers. On the other hand, consumers find it difficult to get
sufficient supply of goods. In such situation where price mechanism fails to maximise the position
of buyers and sellers, the government have no option but to intervene. The intervention can be of
different kinds and have multiple effects on both buyers and sellers.
3. Government Intervention in Market
When the set of two agents, viz, buyers and sellers, fail to restore equilibrium in the commodity
market, we have to call for the services of the third agent, i.e, government to resolve the problem.
Applications Of Demand And Supply
Institute of Lifelong Learning, University of Delhi
The government through its intervention tries to influence the outcomes of the market. The
government can interfere with the working of the economy in two main ways:
The first way in which the government interferes is by fixing the maximum price (often called price
ceiling) or fixing the minimum price (often called price floor). Few examples of price ceiling are:
food grains price control, rent control. In price ceiling, there is a restriction on the sellers to charge
price above fixed price. Agricultural price support programme and minimum wage legislation are
some of the examples of price floor. Price floor assures minimum remunerative prices to farmers/
labours so as to protect their interest.
The second way in which government interferes with the market system is working through the
market. In this, the government can impose taxes on the commodities or provide subsidies. These
taxes and subsidies affect the market supply and demand curves which determine prices of goods
and services. Imposition of heavy excise duties on cigarettes or other drugs and providing
subsidies on agricultural products are examples of government intervention through market.
4. Price Ceiling
Price ceiling is the maximum price limit that is fixed legally by the government in order to “freeze”
the price of a certain commodity to protect the interest of the buyers. A price ceiling can cause
problems if imposed for a long period without controlled rationing. The government of India has
imposed price controls on a number of commodities such as fertilizers, petroleum products, LPG,
etc.
4.1 Binding and non-binding price ceiling
Government can fix the price either above or below the market equilibrium price. If ceiling price is
more than market equilibrium price, then it has no implications on the market outcome. At higher
price, the demand will fall and supply will rise, pushing the price back to the equilibrium level. This
Read More