Quiz 4: Supply and Demand: Applications and Extensions


In the construction of house among various forms of factors of production labor is one of the key factor input. The market price of labor is the wage rate. Labor comprises of various forms of labor like plumbers, carpenters, electricians. When there is a substantial increase in the demand for housing, there is also a corresponding increase in demand for each of the types of labor as they are the key factors of production. Consequently, when the labor demand increase compared to the labor supply the price of labor, which is the wage rate of the labor, also increases. Hence, an increase in demand for housing results into increase in the wage rate of labor.

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Price ceiling and price floor are both forms of price control. In other words price ceiling and price floor are both forms of intervention of the free functioning of market forces of demand and supply. Price ceiling is a form of price control where the government legally fixes the maximum price that the producer can charge for its product and service. On the other hand, price floor is another form of price control where legally the minimum price that the consumers or buyers need to pay is fixed. If the price ceiling is fixed below the market equilibrium level then it would bring forth a series of secondary effect among which fall in the quality as well as future availability of good are some of the outcomes. When the maximum price is fixed below the market equilibrium level then the market demand would be much more than the available market supply. On the other hand since price cannot be increased there is no incentive for the producers to increase the supply as profit incentives are destroyed. As profits cannot be made any more through increase in price hence producers tries to decrease cost by decreasing the cost of production and hence the quality of the product in question deceases. On the other hand, since production and sale of the product is no longer a profitable business the producer would prefer to invest the resources to more profitable sectors that are free from price control and eventually the future supply of the product would decrease.

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