Supply ,Demand & Government intervention – Assignment help !

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    We have already studied about supply and demand analysis and how the markets tend to move toward their equilibrium prices and quantities. Price of goods will automatically adjust themselves so that quantity demanded must be equal to supply of commodity. But sometimes, in case of certain commodities the govt intervenes and fixes some price limit against the equilibrium prices. Such interventions in commodity market focuses on the following two cases :

    1. Price Ceiling
    2. Price Floor

    A price ceiling is the legal maximum price for a good or service, while a price floor is the legal minimum price. Although both a price ceiling and a price floor can be imposed, the government usually only selects either a ceiling or a floor for particular goods or services.

    In a competitive market, prices of goods & services are determined by the forces of demand and supply. When the government imposes price controls, there is either excess supply or excess demand, since the legal price is often very different from the market price. Indeed, the government imposes price controls for the very reason that it is not satisfied with the market price.


    Price ceiling means the maximum price of a commodity that the sellers can charge from the buyers. Often, the government fixes this price much below the equilibrium price of commodity. so. that it becomes within the reach of poorer section of society.

    For example : In a poor country like India, certain food grains or life saving medicines often found to be scare. Hence, their equilibrium price will be high. Bulk of poor population finds it difficult to buy them and therefore suffers deprivation. Such a situation often compels the government to intervenes with price ceiling and fix a price generally much below the equilibrium market price.


    But when the price ceiling is introduced, forces of supply and demand tends to react. Let us take a look that how they react :

    In the above diagram, downward sloping curve denotes the demand curve and upward sloping curve denotes supply curve. The point where both the curves cut each other indicates equilibrium point. P* is the equilibrium price and Q* is equilibrium quantity. Considering the fact thet most of people could not afford to buy the product at P* price, government intervenes. Ceiling price P*PC is fixed which is lower than the equilibrium price. Now, If price changes from P* to P*PC, Demand will extend from Q* to QD. On the other hand supply will contract from Q* TO QS. Consequently a gap emerges between the demand and supply also known as situation of excess demand i.e- QD-QS.

    Excess demand would spell its implications. people will fail to buy as much as they wish to buy. And a situation of partial hunger may prevail.


    Price floor means the minimum price fixed by the government for a commodity in market. Government in most countries generally fixes the floor price for most agriculture products, food grains in particular.

    For Example : Lets take a real life example. Most of the farmers in India grow wheat which is a seasonal crop. Being harvested at same time and also the holding capacity being nil, the farmers sell their produce immediately. Consequently due to high supply, the price of wheat crashes. Farmers would deter to produce less wheat and there could be nation wide shortage of wheat. Here, the govt intervenes and resort to a policy of floor price of wheat. Accordingly, the income of farmers is regulated as well as continuous production of wheat is assured.

    The diagram shows P* and Q* as equilibrium price and quantity respectively. Considering the fact that equilibrium price is considerably low, government fixes P*PF as the floor price. A rise in prise tends the demand to contract from Q* to QD and the supply extends from Q* to QS. There emerges excess supply i.e- QS-QD. The givt, buys its surplus and stores it, often at buffer stock.

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