Lecture 05 # Price Instability & Government Measure

Question 1

What is Price Instability in market?

Answer 1

Price instability refers to significant fluctuations in the prices of goods and services over a short period of time.

Question 2

Impacts of price instability?

Answer 2

Price instability can disrupt economic planning and decision-making for consumers, businesses, and governments

Question 3

Key aspects of price instability?

Answer 3

Inflation: Rapid price increases reduce money’s purchasing power, leading to uncertainty, less savings, and reduced investment.

Deflation: Falling prices may cause consumers to delay purchases, slowing economic growth and increasing unemployment.

Volatility: Price volatility complicates long-term planning and contracts, causing economic inefficiency.

Question 5

Causes of price instability?

Answer 5

1. Supply Shocks: Sudden changes in goods’ availability (e.g., natural disasters).
2. Demand Shocks: Sudden changes in consumer demand (e.g., economic booms).
3. Monetary Policy: Central bank actions affecting inflation and deflation.
4. Fiscal Policy: Government spending and taxes impacting price levels.
5. Exchange Rate Fluctuations: Currency value changes affecting import/export prices.

Question 6

Consequences of Price Changes?

Answer 6

1. Uncertainty: Difficulties in decision-making for consumers, businesses, and investors.
2. Resource Misallocation: Distorted price signals lead to inefficient resource use.
3. Income Redistribution: Inflation and deflation can unevenly affect income distribution.

Governments and central banks aim to maintain price stability for a stable economy.

Question 7

What is Price Stabilization Policy?

Answer 7

Price stabilization policies by governments aim to address fluctuations in agricultural prices, providing stability for both producers and consumers.

Question 8

Objective of price stabilization policy?

Answer 8

Objective: Reduce price volatility in agriculture.

Question 9

Government actions against price instability?

Answer 9

Government Actions:
Buffer Stocks: Store surplus commodities and release during shortages.
Price Controls: Set minimum (floors) and maximum (ceilings) prices to prevent extreme fluctuations.
Subsidies: Offer financial support to farmers to stabilize incomes and ensure consistent production.

Question 10

Explain price maxima and minima in goods market?

Answer 10

Price maxima and minima policies in goods market involve the government setting maximum (price ceilings) or minimum (price floors) prices for certain goods within a market.

Question 11

Explain price maxima in goods market?

Answer 11

Price Ceilings (Maxima) in Goods Market:

1. Objective: Protect consumers from high prices during shortages or emergencies.
2. Implementation: Government sets a maximum allowable price for a product or service.
3. Impact: Can cause shortages, reduced quality, and black market activities if set below equilibrium price.

Question 12

Explain price minima in goods market?

Answer 12

Price Floors (Minima) in Goods Market:

Objective: Ensure producers receive a minimum price, often for agricultural products.
Implementation: Government sets a lowest allowable price for a commodity.
Impact: Can lead to surpluses, inefficiencies, and storage issues if above equilibrium price.

Question 13

Explain price maxima and minima in factor market?

Answer 13

Price maxima and minima policies in the factor market involve the government setting maximum (price ceilings) or minimum (price floors) prices for factors of production, such as wages or rents.

Question 14

Explain price maxima in factor market?

Answer 14

Price Ceilings (Maxima) in Factor Market

1. Objective: Protect workers from excessively low wages or compensation.
2. Implementation: Government sets a maximum limit on wages or remuneration.
3. Impact: Can cause labor shortages, reduced productivity, and deter investment in some sectors.

Question 15

Explain price minima in factor market?

Answer 15

Price Floors (Minima) in Factor Market

1. Objective: Ensure a minimum level of compensation for workers or factors of production.
2. Implementation: Government sets a minimum wage or payment level.
3. Impact: Can cause unemployment for low-skilled workers and pose challenges for businesses, especially small ones.