In pure market economy, price has been set by price mechanism where it coordinates the interaction between demand and supply resulting in a price changes. According to an economist Adam Smith (1776), in his book “The Wealth of Nations”, price mechanism is likened to be an “invisible hand” which will coordinates the decision made by consumers and suppliers while the economic system are working automatically. However, the theory of “invisible hand” is not absolute. The market economies requires institution such as government to implement policies and making decisions to maintain market and avoid market failure like monopoly and negative externalities. Therefore, government interventions are clearly crucial in the economy to maintain the balance of price and maximizing social and economic welfare to improve market outcomes. For example here, government intervention such as decision to guarantee continuous supplies of horticultural products such as fruit and vegetables will not only complement the high demand and needs for nutrition by society, but it will also avoid price to increase du...
The current issues that have been created by the market have trapped our political system in a never-ending cycle that has no solution but remains salient. There is constant argument as to the right way to handle the market, the appropriate regulatory measures, and what steps should be taken to protect those that fail to be competitive in the market. As the ideological spectrum splits on the issue and refuses to come to a meaningful compromise, it gets trapped in the policy cycle and in turn traps the cycle. Other issues fail to be handled as officials drag the market into every issue area and forum as a tool to direct and control the discussion. Charles Lindblom sees this as an issue that any society that allows the market to control government will face from the outset of his work.
The United States is sometimes described as a “reluctant welfare state.” I agree with this statement. Too often there are programs created by our government that, although may be lined with good intentions, end up failing in their main purpose. The government may, and hopefully does, seek to help its citizens. However, by applying unreasonable qualifying or maintenance criteria, or too many restrictions that bar people from even receiving aid at all, they end up with many more problems than solutions. Three examples of policies that do this are: Medicare, No Child Left Behind, and TANF, or the Temporary Assistance for Needy Families.
Government effects my life everyday in a vast variety of ways. From the quality of the milk that I drink in the morning, to the license and Insurance I need to drive my vehicle to school and work. Government also effects the taxes that are deducted from my salary. The government uses this money to protect consumers and provide services for the public amongst many other things.
However, price controls historically is widespread, steady, and lackluster. Tight controls on prices lead resources to be unused and production to be cut short. Widespread famines assure providers a steadfast demand for inferior services and prevent them from profiting by innovating or improving quality. Prices fixed by sanction lessen enticement for providers to cut costs and encourage them to seek profits by playing politics rather than by serving their customers. Whil...
Classical Economics is a theory that suggests by leaving the free market alone without human intervention; equilibrium will be obtained. This theory was the first school of thought for economists and one of the major theorists and founders of Classical Economics was Adam Smith. Smith stated, “By pursuing his own interest, he (man) frequently promotes that (good) of the society more effectually than when he really intends to promote it. I (Adam Smith) have never known much good done by those who affected to trade for the public good.”(Patil) Classical Economic theory assumes three basic ideas: Flexible Prices, Shay’s Law, and Savings-Investment equality. Flexible prices in Classical theory suggests prices will rise and fall as needed but is not always true, due to, the interference of government agencies including unions and laws. Smith stated in the Wealth of the Nation (1776), “Civil government, so far it is instituted for the security of property, is in reality instituted for the defense of the rich against the poor, or of those who have some property against those who have none at all.” (Patil) Shay’s Law implies supply creates its own demand and demand is not based on production or supply.
The market price of a good is determined by both the supply and demand for it. In the world today supply and demand is perhaps one of the most fundamental principles that exists for economics and the backbone of a market economy. Supply is represented by how much the market can offer. The quantity supplied refers to the amount of a certain good that producers are willing to supply for a certain demand price. What determines this interconnection is how much of a good or service is supplied to the market or otherwise known as the supply relationship or supply schedule which is graphically represented by the supply curve. In demand the schedule is depicted graphically as the demand curve which represents the amount of goods that buyers are willing and able to purchase at various prices, assuming all other non-price factors remain the same. The demand curve is almost always represented as downwards-sloping, meaning that as price decreases, consumers will buy more of the good. Just as the supply curves reflect marginal cost curves, demand curves can be described as marginal utility curves. The main determinants of individual demand are the price of the good, level of income, personal tastes, the population, government policies, the price of substitute goods, and the price of complementary goods.
It is widely believed by scholars that many of the varying levels of economic development between states are the direct result of a negative correlation between the aforementioned and the varying degrees of state intervention. In most cases it is evident that the more a state intervenes in its economy, the less the country will develop. While, at the same time, a country whose intervention exists at a minimal level will tend to have a stronger economy and a more rapid rate of development. However, it is also important to understand that as with many concepts there will always be extreme cases where the states may not strictly follow this model; in some cases they may even behave completely opposite. These extreme cases are often due to the idea that a state will either behave in a predatory or developmental manner.
The formation of equilibrium comes when the goods demanded are equivalent to the goods provided (DS); this allows the government to set a price floor (P1); this benefits society as in order for the market to be efficient minimum price must be above the; as when the supply produced exceeds (Q1) that demanded (Q2) by the public this allows consumers who can afford the goods or services to purchase regardless of the prices – this is beneficial to the reduction of social welfare as will suppliers have excess quantity, this drives as a trigger for producers to reduce their prices towards the price floor in order to increase demand for their product or service to make optimal profits allowing for consumers to get the best price as well as increasing consumer surplus for the original consumers.
Price reform has allowed the introduction of freely-operating market signals in most sectors of the economy. Liberalising prices has allowed supply to be much more responsive to demand from consumers. Price reform is now almost complete as most prices have been substantially deregulated and the state’s role in guiding or fixing prices is now minimal.
This view implies that governments intervene for many reasons, including the redistributional and stablisation functions. While market failure is one reason for intervention, other considerations, including questions of equity and social justice determined the nature and the extent of government intervention. This point was expanded upon by Groenewegen (1990,2) who argued that the extent of market intervention in the supply, distribution and redistibution of goods and services are not dictated by purly political and ideological considerations, other considerations may play a role including the failure of the market in certain instances to ensure efficient, equiable allocation of resources.
The government may choose to set prices different to those set by the markets. Prices are not allowed to drop below a certain minimum. For example, in Agriculture, government may choose to subsidies farmers, set production quotas or offer price supports. Government may decide to set price ceilings or price floors. The government may also choose to increase or decrease taxes on certain commodities. In this essay, we will look at the effects of government intervention from an economic perspective.
Around the world, governments, mostly intervenes in the market in order to accomplish their policy objectives. The government’s policy objectives or goals could be related to economics, ranging from stabilization of prices, export promoting, encourage equal distributions for income and commodity protection. The examples as per above proves that government intervention is not only limited to economic effects also influences the society. There are two (2) types of usually regulated government interventions, which are automatic and discretionary. Automatic can ale defined as intervention which is based on rules and regulations. On the other side, government interventions which are discretionary mostly targets stopping, suspension or limitation of a certain contract market.
Keeping up steady food prices has turned into a common goal for every government, particularly in the growing countries in which essential food products are mostly not produced. Regardless of these domestic pressures, measures pointed at reducing food price's instability would harm more. Think about an policy of a price ceiling on sugar: in light of the extra demand over supply (which a price increase might offset), the government might either need to apportion sugar or take care of the demand through importation, which would just raise the world market price of sugar considerably more. Price ceiling is basically the maximum price a dealer is permitted to charge for an item or administration. Price ceilings are generally situated by law and point of confinement the dealer valuing framework to guarantee reasonable and sensible business hones. Price ceilings are typically situated for fundamental costs; for instance, a few zones have "rent ceilings" to ensure leaseholders from climbing rent prices.
One of the limitations of economic theory is that in order to show the relationship between price and quantity demanded or quantity supplied other factors that influence quantity demanded, for example the price of a substitute good, or quantity supplied, for example the price of an input, are held constant. These factors are held constant, because in reality, they are constantly changing. This can make it difficult to determine how one factor, such as price, can affect another factor, such as quantity demanded or supplied, because other constantly changing factors are influencing quantity demanded or supplied at the same time. This is a limitation because these other factors have an influence on quantity demanded or supplied, and can therefore influence the outcomes of decisions by individuals and firms. For example, a Pie Firm might decide to lower the price of their apple pies believing it will increase individuals demand for apple pies because they are now relativ...
So far, we used supply and demand to examine the way in which prices are determined when firms sell their output to consumers in the market for goods and services. In producing, firms must buy the services of land, labour, and capital, the factors of production, in order to make the goods and services to sell to consumers. Supply and demand may also be used to examine how the prices of these factors of production are determined.