Simple Application of Tools of Demands and Supply (Top 5 FAQs)

Read this article to learn about the top five frequently asked questions on the Simple Application of Tools of Demands and Supply.

Q.1. What is the difference between a welfare state and a freely functioning market?

Ans. I. Welfare State implies that for the sake of welfare of people, government takes steps to control prices if need be.

II. In a freely functioning market however, the government doesn’t interfere. Forces of Supply and demand dictate the price level in the market.

Q. 2.What kind of steps does government take?

Ans. Government role can be either direct or indirect. It can straightaway enact laws to discipline the price in a particular industry. Alternatively, it can change the level of subsidies, duties, taxes etc. in such a way that force the manufacturers to maintain a certain level of price. Is there any other impact of price control?

Yes, it may generate either / both of following:

(i) Rationing:

Price control leads to increased demand. Allocating the available quantity judiciously through Fair price Shops is called Rationing.

(ii) Black marketing:

To take unfair advantage of increased demand situation, some people resort to unfair trade practice like black marketing viz. selling goods at price higher than those fixed by government.

Q.4. Does government ever fixed price above equilibrium level too? If yes. When?

Ans. Yes, whenever the government wishes to ensure essentially for farmers that they get right price for their crops like wheat, rice etc., it fixes a minimum price above the equilibrium level. It is also called Floor Price.

Q.5. What are the effects of Floor Price?

Ans. Effects of Floor Price are as follows:

(a) Government has to bear some cost.

(b) Farmers are assured of a satisfactory income.

(c) Consumers however have to pay higher price since government passes some part of its cost to consumers by way of additional taxes.