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Price Elasticity of Demand Case Solution & Answer

Price Elasticity of Demand Case Solution

Government intervention in the market

Due to negligence of decision making in the price mechanism,the market can be diminished with the decision of the producers. Hence, government intervention is necessary in-the market to allocate resources effectively.The purpose of intervention of government in the market can be leveraged in the following cases:

  • If the good is under consumed or over consumed by the users.
  • If the government believes that it can redistribute the income and the wealth in the equitable approach.
  • Improvement in the performance of the economy can be changed due to change in the policy of the producers.

For the purpose of amendments in the market policy for the betterment of the market demand, government intervention can be followed through the following interventions that are:

  • Indirect tax
  • Subsidies

    Regulation

     

From the above two, major and most relevant aspects are discussed below

Subsidies

The Subsidiary refers to the amount that is paid by the government to the producers. The payment is made at per unit cost that shifts the supply curve of the commodity to the right.However,per unit of total subsidiary’s the variation among supply curves.

The government pay to the tax payers that is equal to per unit cost of the total subsidiary. In the following diagram P1 is the price of the commodity. Whereas Q1 is the quantity demanded of the user for the commodity. The area of P1, P2, a and b is the subsidiary cost. The picture demonstrates that the effects of subsidiary have increased the quantity of demand for the product.

Price control

Pricing control may involve the minimum pricing, minimum prices and zero prices polices for the commodity intervened by the government in market.

Maximum Price in the market

            The maximum price is the price beyond which it is not allowed for the producers to make the rise. However, it is not the fixed and can fall below this level.

           From the above diagram, it can be depicted that the firms increase the prices of the goods due to government intervention. The rise in prices leads towards decrease in the consumption of the goods. The reason of making an increase in the price is the shortage of the supply of a good in the industry. The shortage can be appeared to the market due to certain factors,for example bribe. Thus, the shortage of the product is appeared that is from Qs to Qd in the diagram. The goods can be thus, only obtained by the consumers who can pay high price for the product.

Minimum Pricein the Market

            A minimum price in the market can be achieved in the opposite perspective of the maximum price. This is the maintained level implemented by the government that the level of price cannot go beyond this level. However, a rise can be made to the level above it.

 

The diagram above demonstrates that the surplus in the market can lead towards the minimum price in the market. The surplus supply is shown as Qd and Qs in the diagram. The price is not allowed to be reduced therefore; the effects of the price mechanism and its signals cannot be felt to the incentives and rationalizing.

Zero Pricing

It is the extreme type of pricing in the market for a commodity. It shows that the commodities or services are provided free of charge………………..

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