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CONTROLS ON PRICES
Price control is usually enacted when policymakers believe the market price is unfair to buyers or sellers. There are two types of price control: 1) Price ceilings 2) Price floors.
Price Ceiling
Price Ceiling
A legal maximum on the price at which a good can be sold.
Effects of Price Ceilings A price ceiling creates shortages of the product because QD > QS. Example: Price ceiling of some of the essential products during Ramadan. The result of price ceiling is rationing.
Supply
$3
2 Shortage Price ceiling Demand
75 Quantity supplied
Why prices of essentials go on rising during Ramadan and how govt. control price
Every year, wholesale and retail prices of essentials shoot up during the holy fasting month of Ramadan not only in Bangladesh but also in many other Muslim countries. Traders do it, taking advantage of the anticipated spike in local demand. Prices start to take vertical drift leaving the common and especially marginal people beyond their purchasing capacity. Initiatives are taken each and every year; however, we lose the battle in containing soaring prices due to excessive profit motives of someA businessmen and lack of proper monitoring by the government ahead of the Ramadan. Under these circumstances (like any other year) in 2013 govt. took initiative to control price. Govt. decided to set ceiling prices for some of the essential commodities. For example govt. fixed the retail price of lentils at Tk. 70-80 per kg, chickpeas at Tk. 62 per kg and dates at Tk. 75-80 per kg.
Price Floor
Price Floor
A legal minimum on the price at which a good can be sold.
The price floor is a price which is set above the equilibrium price, leading to a surplus of the product as QS > QD. Examples: The minimum wage, agricultural price supports
Supply
Price floor
Wage
Labor Supply
Labor demand
0 Quantity demanded Quantity supplied Quantity of Labor
TAXES
Governments levy taxes to raise revenue for public projects.
What was the impact of tax?
Taxes discourage market activity. When a good is taxed, the quantity sold is smaller. Buyers and sellers share the tax burden.
A Tax on Buyers
Price of Ice-Cream Price Cone buyers pay $3.30 Price 3.00 2.80 without tax Price sellers receive
Supply, S1
Tax ($0.50)
A tax on buyers shifts the demand curve downward by the size of the tax ($0.50).
D1 D2
90
100
A Tax on Sellers
Price of Ice-Cream Price Cone buyers pay $3.30 3.00 Price 2.80 without tax Price sellers receive Demand, D1
S2
S1
A tax on sellers shifts the supply curve upward by the amount of the tax ($0.50).
90
100