ECO415: Semester March – August 2021

EXERCISE CHAPTER 4: MARKET EQUILIBRIUM

Question 1

Set Price Ceiling During Festival Season. Good or Bad?

During festival seasons, such as Chinese New Year and Hari Raya Aidil Fitri, the Malaysian
Government imposes a price ceiling on some items. There is always the case when buyers complain
that the prices have increased and become too high. This is when the authority imposes a price
ceiling to eliminate such dissatisfaction. This year, the Government imposes price ceiling on 13 items
including round cabbage, garlic, shrimp, pomfret, chicken and chicken eggs.

When the price ceiling is set, the sellers will experience a smaller profit margin. Hence, they will find
a way to cover up the loss by selling a lower quality of these controlled items. Besides, a buyer might
not be able to get these items from a single market, and he or she is now required to spend more
time searching for those items. In addition, when the government sets a price ceiling to these
popular items during these festival, these products will fall below their equilibrium level because at
lower price the quantity demanded has exceeded the quantity supplied and caused shortages in the
market.

The Chinese have been using certain items including those items listed above that are necessary for
prayers and celebrations, making the demand for these controlled items during Chinese New Year
price inelastic. The Chinese will still buy them at a higher price. Due to such behaviour from the
Chinese buyers, sellers will take advantage on them through black market. In reality, the prices of
these popular items rise when it is nearer to the actual date of Chinese New Year, even with the
price ceiling.

http://www.nst.com.my/top-news/13-items-come-under-price-control-for-cny-1-30913#

Questions:

(a) Define price ceiling and draw a diagram to illustrate such price control.

(4 marks)

(b) Briefly explain the reason why the Government imposes price ceiling on some items during
festive seasons and state two (2) disadvantages of price ceiling cited in the article.

(4 marks)

(c) Using a diagram, explain what happens to demand for the controlled items, such as chicken
and shrimps during Chinese New Year and how it will affect the market demand.

(4 marks)

(d) Explain two (2) ways in which supply of chicken can be increased.

(8 marks)

Question 2

(a) Using appropriate diagrams, explain what maximum and minimum prices are.
ECO415: Semester March – August 2021

(b) Give one reason each for the imposition of maximum and minimum prices by the
government.

(c) Explain one disadvantage each of maximum and minimum prices.

Multiple Choices Questions

1) Equilibrium price is the price_______________________.

A. at which quantity supplied is equal to quantity demanded.

B. level at which the producer is willing to supply the good.

C. level at which the consumer is willing to demand the good.

C. which is fixed by the government.

2) A market is in equilibrium

A. provided there is a surplus of the product.

B. at all prices above the intersection point of the supply and demand curve.

C. when the amount the producers want to sell is equal to the amount the consumers
want to buy.

D. whenever the demand curve is downward sloping and the supply curve is upward
sloping.

3. One advantage of the price mechanism for allocating resources in an economy is that, it,

A. avoids unemployment.

B. reduces inequality in incomes.

C. enables goods to be produced at the lowest possible cost.

D. gives the opportunity for individual’s to indicate their preferences for goods within
their spending power limits.

4. Answer questions 4 and 5 based on the table below.

Table 4.1

Quantity demanded (units) Price Quantity Supplied (units)

1,000 4 700
900 6 750
800 8 800
700 10 850
600 12 900

Based on the data, the market will be in equilibrium if the price is

A. RM6.00

B. RM8.00

C. RM10.00
ECO415: Semester March – August 2021

D. RM12.00

5) If the price is RM10.00, there will be

A. an excess supply by 150 units.

B. a shortage of supply by 150 units.

C. an excess of demand by 850 units.

D. a shortage of demand by 700 units.

6) The price of a good tends to rise if

A. there is a surplus at the current price

B. the quantity demanded exceeds the quantity supplied at the current price.

C. the current price is above equilibrium

D. income decreases

7) Which of the following is most likely to increase the price of personal computers?

A. Technological improvement in the computer industry.

B. A fall in household income.

C. The imposition of RM400.00 per unit tax on personal computers.

D. The expectation that the price of personal computers will drop in the next six
months.

8) Agricultural price supports are designed to

A. reduce the excessive demand for agricultural products.

B. keep the price high to benefit producers.

C. keep the price low to benefit consumers.

D. keep the prices low to discourage oversupply.

9) A black market will tend to occur when

A. a price ceiling is imposed by the government

B. a price floor is imposed by the government

C. a market has no price regulation.

D. a price is set higher than the equilibrium price.

10) The government wants to protect consumers against increasing price of bread. Therefore price
restrictions are imposed on bakeries prohibiting them from raising price of bread.” This price
restriction is known as

A. price ceiling

B. price floor
ECO415: Semester March – August 2021

C. equilibrium price

D. moderate price.

END OF QUESTIONS