Effects of Government Interference with Price System | Economics for JAMB PDF Download

Equilibrium Price and Quantity in Product and Factor Markets

1. Equilibrium in Product Markets:

• Equilibrium refers to the point at which the quantity demanded and quantity supplied of a product are equal.
• The equilibrium price is the price at which the quantity demanded and quantity supplied intersect.
• At prices below the equilibrium, there is excess demand (shortage), leading to upward pressure on prices.
• At prices above the equilibrium, there is excess supply (surplus), leading to downward pressure on prices.

2. Equilibrium in Factor Markets:

• Factor markets involve the buying and selling of factors of production, such as labor and capital.
• The equilibrium in factor markets is determined by the interaction of the demand for and supply of factors.
• The equilibrium wage rate and quantity of labor are determined by the intersection of the labor demand and labor supply curves.

Price Legislation and Its Effects

1. Government Interference with the Price System:

• Governments may intervene in markets to influence prices for various reasons, such as protecting consumers or ensuring fairness.
• Price legislation refers to government-imposed controls on prices, including minimum and maximum price laws.

2. Minimum Price Legislation:

• Minimum price legislation sets a floor below which prices cannot legally fall.
• The aim is to protect producers by ensuring they receive a fair income for their products.
• Minimum price legislation often leads to surpluses when the minimum price is set above the equilibrium price, as quantity supplied exceeds quantity demanded.
• Examples of minimum price legislation include minimum wage laws and agricultural price supports.

3. Maximum Price Legislation:

• Maximum price legislation sets a ceiling above which prices cannot legally rise.
• The goal is to protect consumers by preventing prices from becoming too high.
• Maximum price legislation often leads to shortages when the maximum price is set below the equilibrium price, as quantity demanded exceeds quantity supplied.
• Examples of maximum price legislation include rent controls and price caps on essential goods.

Effects of Changes in Supply and Demand on Equilibrium Price and Quantity

1. Changes in Supply:

• An increase in supply leads to a rightward shift of the supply curve, resulting in a lower equilibrium price and a higher equilibrium quantity.
• A decrease in supply leads to a leftward shift of the supply curve, resulting in a higher equilibrium price and a lower equilibrium quantity.

2. Changes in Demand:

• An increase in demand leads to a rightward shift of the demand curve, resulting in a higher equilibrium price and a higher equilibrium quantity.
• A decrease in demand leads to a leftward shift of the demand curve, resulting in a lower equilibrium price and a lower equilibrium quantity.

3. Interpreting the Effects:

• Changes in supply and demand affect the equilibrium price and quantity in opposite directions.
• When supply and demand both increase, the equilibrium quantity will increase, but the price change will depend on the magnitude of the shifts.
• When supply and demand both decrease, the equilibrium quantity will decrease, but the price change will again depend on the size of the shifts.
• Analyzing changes in supply and demand helps predict market outcomes, including price changes and quantity adjustments.