Government intervention application

Question 1

Maximum price application

Answer 1

Originally in this free market, equilibrium is at point e with a price of p and a quantity demanded and supplied of Q. If the government intervene and implement a minimum price at Pm , then quantity supplied would increase to Q2 and quantity demanded decreases to Q1 .Firms can charge a higher price to increase their revenue and consumers are discouraged from buying due to the higher prices charged. The result is an excess of quantity supplied for the good and a shortage of quantity demanded

Question 2

Maximum price application

Answer 2

Originally in this free market, equilibrium is at point e with a price of p and a quantity supplied and demanded of Q. If the government intervenes and implements a maximum price at Pm, then quantity demanded would increase to Q2 and quantity supplied would decrease to Q1. Firms will receive less revenue due to lower price but consumers are encouraged to buy due to this. The result is a shortage of quantity supplied for the good and excess quantity demanded.

Question 3

Taxes application

Answer 3

Originally in the free market, equilibrium is at point e with a price of p and a quantity demanded and supplied of q. If the government imposes a production tax, supply curve would decrease to S1 because of a rise in COP, price increases to P1 because firms are profit maximisers, quantity supplied and demanded decreases to Q1 as consumers will demand less units due to the higher price of the good. Now the market will have a new equilibrium of e1, with a higher price of P1 and a lowed quantity demanded and supplied at Q1. Tax revenue is is shown by ABCP1.

Question 4

Subsidy application

Answer 4

Originally in this free market, equilibrium is at point e, with a price of p and a quantity demanded and supplied of Q. if the government provides a subsidy to a firm, supply would increase and shift from S to S1. This is because a subsidy to produce would cause the COP to decrease for firms in this market to supply more to the market. The price decreases from P to p1 to encourage consumers to buy. Quantity demanded and supplied increases to Q1 as more units are supplied and demanded at a lower price. Now the market is at an equilibrium point of e1, price lowers from p to p1, quantity demanded and supplied increases from Q1. the subsidy is shown by ABCP1.