MARKET EQUILIBRIUM

Definition

Market equilibrium refers to a situation when a quantity demanded and quantity supplied is equal and there is no tendency for price or quantity to change.

When a market is in equilibrium, the quantity that the seller is willing to sell is exactly balances the buyers are willing to buy, and there is no tendency for the market price to increase or decrease. Equilibrium can occur irrespective of the price and quantity involve.

Government Price and Minimum Price

There are several types of government intervention on market equilibrium. The forms of intervention are the fixing of a higher limit or a lower limit on prices in certain markets and the imposition of taxes and subsidies for certain items.

Maximum Price and Minimum Price

The government controls and fixes certain goods and services such as sugar, rice cooking oil, cement, taxi fares et cetera. The government determined the price and not the price mechanism.

There are two types of price control: floor price and ceiling price

Ceiling Price

It is the government imposed regulations that prevent the prices from rising above a maximum level as set by the government. Ceiling price is also referred as a maximum price.

When the government sensed that the price of essential commodities were likely to hikes such as rice, cooking oil, sugar et cetera, then the government would imposed the ceiling price.

This method of price control is also applied to keep the monthly housing rental below the equilibrium level which also called rent control.

Under the ceiling price, consumers can buy product at lower prices which is an advantageous on consumer’s perspectives but by fixing the ceiling price also will creates an excessive demand for the product and this could lead to black marketing.

Floor Price

Floor price is a government imposed regulation to prevent the price from falling bellow the minimum level as set by the government. It is also known as minimum price. This price control method is initiated by the government in the agriculture sectors made to protect the farmer in the event where the prices of the commodities are too low in the free market.

Floor price is also imposed on the minimum wage rate. The minimum wage rate is the lowest wage paid by employer to worker to protect them from exploitation. The benefit of imposing this method is to reduce poverty.

When there is floor price, the incomes of producers are protected as the government buys up all surpluses of goods and services. The government will also store these surplus goods for future use. Lower paid workers are better off with a higher wage rate with the floor price which prevents incomes from falling below a certain level. But the disadvantage is where prices are higher than the equilibrium price under the floor price. Therefore, consumers have to pay more for goods and services. A surplus will occur when there is a floor price and the government will need to purchase excess supplies of agricultural commodities such as cocoa, corn, dairy products and other. Higher wage rate will create unemployment problems as the supply of labour is greater than the demand of labour.

TAXES AND SUBSIDIES

Effect of Taxes on Equilibrium Price and Output

When the government imposes a tax on the sale of goods, the price of the goods might rise by the same amount as the tax imposed. The increase in the price of goods whether in full or in part or none at all, depends on whether the burden of tax falls on the buyers or the seller.

Indirect tax is a tax that is imposed by the government to the producers or seller but paid by or passed on to the end-users. Indirect taxes consist of import duties, excise duties, sales tax, service tax and export duties.