Tutorial 2 Question 5

(a) Based on the article above, identify 3 reasons why the prices of certain items are
controlled by the government.
The 3 reasons are:
To enable consumers to obtain necessary items for the festive season at

reasonable prices
Check excessive price hike
Reduce the burden of cost of living

(b) Identify the type of price control imposed by the government.

Price ceiling. Price ceiling is a legal maximum on the price of a good and service.

(c)
i.

Using appropriate diagrams, explain when the above price control is binding and
when it is non-binding.

When the price ceiling is set below the equilibrium price, the price ceiling is
effective. Since the price of goods and services cannot go higher than the
regulated ceiling, it is impossible to attain equilibrium price. Therefore, the buyers
will be willing to demand a higher quantity than initially demanded whereas the
sellers are willing to supply lower quantity than originally supplied. This has
caused shortages on market.

When the price ceiling is set above the equilibrium price, the price ceiling is said
to
be

ineffective. This is because buyers are more willing to pay for goods and services
at the equilibrium price and the sellers are willing to supply goods and services
and get paid at the equilibrium price. So, the market clears at the equilibrium
price. Therefore, the price ceiling is non-binding.
ii.

Describe their effects on market outcomes in terms of price and quantity.

For price ceiling that is binding, the price of the goods will drop and restricted to
the stipulated price level. Other than that, the quantity demanded will be greater
than the quantity supplied. Therefore, this will cause a shortage in the market.
For price ceiling that is non-binding, the price of the goods will still remain at the
equilibrium. The quantity demanded is equal to the quantity supplied. Therefore,
there is no market effect for price ceiling that is non-binding.