Lecture 3 - Applications Of Demand And Supply | Microeconomics- Interaction between individual buyer-seller PDF Download

 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