Essay Assignment on Price Regulation

Price regulation also disrupts the supply and demand relation in an economy. The process of defining the market prices of goods and services through the dynamic interaction of supply and demand can be termed as the underlying fact of economics. Generally the amount bought of a product depends on the preference of the consumers for that product and its price. With other factors remaining constant, consumers will buy more quantity of the product if its price declines. On the other hand producing companies, take decision on the amount they want to produce and supply at different levels of price. Hence we can say that generally, when consumers want to pay greater price for a particular product, then more number of firms will enter the market and try to produce the product. Apart from this the existing firms will try to increase the production capacity and will take different policies to improve the quality of the product. This way we can see that if the price of a product is perceived as increasing, more quantity of it will be produced by the firms to gain more profit.

This relation between supply and demand gives rise to equilibrium. The market price which is determined at this equilibrium position is called the equilibrium price. At this price the transaction that takes place between the buyers and sellers is smooth and free. In the equilibrium position, the price that is attained determines the quantity which is demanded by consumers and is equal to the output produced by the firms. But when price regulation is exercised by the regulatory authorities or the government, the market price of a product is defined by the process and this regulation compels all the producing firms to sell the product at the pre defined price instead of the equilibrium price that is obtained by the dynamic interaction of the supply and product in the market. One more problem is that, though supply and demand curves are ever shifting due to the varying tastes of the consumers and input costs of the firm, but the price set by the government can be changed only through a very long and tedious political process. Subsequently the price set by the government will never be equal to the market equilibrium price. This means that the price set by the regulation process will be either too high or too low and will affect the overall industry or the firm.

When the price that is regulated by the authority is very high, the quantities produced by the firms are excessively more than the amount demanded by the consumers. This leads to loss of the producing firm. Then to compensate the producer, government has to purchase the excess production at the regulated price and incur losses. Grave problems also occur when the price set by the government is substantially below the equilibrium market price. This results in demand by the consumers to be much more than the quantity supplied by the producer.