ESSAY SANYA DUA-ECONOMICS Essays - Economy, Economics, Market

ESSAY SANYA DUA-ECONOMICS Explain the role of the price mechanism in the market economy and how and why the government intervenes in the market. Market economy is an economic system where by all major economic decisions are made by individuals and private firms, which are both motivated by self-interest without government intervention. Process by which the forces of supply and demand interact to determine the market price at which goods and services are sold and the quantity produced is price mechanism. In market economy the price mechanism plays important role to determine the solutions to the economic problem. Market equilibrium is the situation where at a certain price level the quantity demanded of a particular commodity are equal. This means that the market clears and there is no tendency to change in either price or quantity. When market does not produce desired outcomes it is called market failure. This occurs because the price mechanism takes account of the private costs and befits of production but does not take into account social costs and benefits. When this occurs, governments may increase in the market. Governme nt may intervene in market place to impose price ceiling (the maximum price that can be charged for commodity) or price floors (the minimum that can be charged for a commodity in order to affect distribution of income. When market quantity is too high government action is taxes to increase equilibrium price and reduce quantity and also subsidies to reduce equilibrium price and increase quantity. 359473527876500Price mechanism determines the equilibrium in the market. The price mechanism is the interplay of the forces of supply and demand, which determine the prices at which commodities will be bought and sold in the market. Market equilibrium occurs where the demand and supply curves intersect. The quantities of goods and services demanded and supplied is regulated by the prices of those goods and services. If the price of a commodity for sale is too high according to consumer demand, the quantity supplied will exceed the quantity demanded. If the price of a commodity is too low according to consumer demand, the quantity that is demanded will exceed the quantity supplied. There is one price, and only one price, at which he quantity demanded, is equal to the quantity supplied. This is known as the equilibrium price. The diagram reveals that at price OP1 the quantity demanded (0Q2) exceeds the quantity supplied (0Q1). The rise in the price results in an expansion in supply and a contraction in demand (movement along the curve towards equilibrium point) This will continue as long as there is excess demand until reaching the intersection of supply and demand curves. At price 0PE the equilibrium. In next diagram at price OP2, the quantity supplied 0Q2 exceeds the quantity demanded 0Q1. Thus we have a situation of excess supply or a glut in the market. In order to remove excess supply sellers will offer to sell at a lower price. The fall in price results in expansion in demand and contraction in supply. 2670810252095000Market failure occurs when the price mechanism takes into account private benefits and costs of production to consumers and producers, but it fails to take into account indirect costs such as damage to environment. Private costs: The cost of an economic activity to individuals (consumers) and firms (production) Benefit is the rewards of an economic activity to individuals (consumers) or firms (producers). Social cost is the cost of an economic activity to society as well as the individual or firm. Social benefit is the benefit of an economic activity to society as well as to the individual or firm. Externalities are the spill over effects of consumption or production. They affect others and can be positive or negative. 3594735570039500When markets do not produce the desired outcomes it is called market failure. When this occurs, governments may intervene in market. The government may feel that the market determined price for some commodities is too high or market determined price of something is too low. The government may intervene in the market place in order to impose to price ceilings (the maximum price that can be charged for a particular commodity) or price floors (the minimum that can be