What ways does government affect supply and demand?

Answer 1

1st way of government policy to affect demand/supply is through price ceilings and price floors. By price ceiling it means that goods have to be sold below this price and price floors means that goods have to be sold above this price set. When price is forced down, suppliers will supply less and consumers will demand for more causing shortage, vice versa, when price is high, supplier will provide more and consumer will demand less causing surplus.

1 such example is price floor on agricultural.

2nd way where government policy affect demand/supply is through enforcing or altering taxes, minimum wage rate, subsidies and so on.

Removing tax and increasing minimum wage rate increases disposable income of consumers which ultimately increase demand of good for normal goods and decrease demand of good for inferior goods. Hence, increasing tax and decreasing minimum wage rate will have the opposite effect.

Increasing subsidies for producers will reduce their cost of production which will increase the suppliers willingness and ability to produce goods and services.

-- By Johan Chua Song Yi

Answer 2

Where the government controls the pricing of a good or service rather than the market, one of three situations could arise.

If the price is set above the market equilibrium price(the price where the quantity offered for sale is equal to the quantity demanded by society), there will be a surplus. This is due to suppliers increasing their supply to the market to take advantage of the high price but consumers not increasing their demand as it is priced higher than they want to, or are able to pay.

Alternatively, if the government sets the price below the market equilibrium price (see above), the producer will supply less to the market so they can redirect their resources to a more profitable good or service, whereas the consumer will demand more as the price is below what they are prepared to pay. This will cause a shortage in the market (greater demand at the price level than supply).

The third situation is where the government sets the price where it would have been in the free market situation (at market equilibrium where supply equals demand)

In the free market system (one without government intervention) the price, supply to the market and demand by consumers will constantly change to maintain equilibrium.

Answer 3

The government can influence supply and demand through taxes and regulations. For example, regulations on foods may affect the costs, which in turn can affect what foods are affordable and most in demand. Regulations on vehicles can have the same effect.

Answer 4

Through:

• taxation
• subsidisation
• legislation
• persuasion
• nationalisation