Question

1. The government is currently considering setting a maximum price (price ceiling) for basic goods to ensure that people can get access to these goods at this current time. Fully explain your answer and also use a single diagram to demonstrate the likely outcomes of this policy if the maximum price is set:

1. Below the current free market price

2. Above the current free market price

3. At the current free market price

2. The Australian government has implemented a number of microeconomic reforms over the past 40 years including deregulation of banking. Do you think banking deregulation has been beneficial or not? Explain your answer. Describe what you think may be the difficulties with microeconomic reform in Australia and highlight an area that you think currently requires microeconomic reform. Justify your answer.

Answer 1

1)

Here the equilibrium price as determined by the market forces is P1.

1) When price is set at p2 which is below the free market price (p1), the quantity demanded in the market is Q3 whereas the quantity supplied is Q2. The demand exceeds the supply.This means that there will be a shortage in the market of Q3-Q2 units.

2) When price is set at p3 which is above the free market price (p1), the quantity demanded is Q2 and quantity supplied is Q3. The supply ecxeeds the demand and this will create a surplus of Q3-Q2 units.

3) When price is set at the free market price, the market will be at equilibrium and the quantity demanded and supplied will be equal and the equilibrium price will be p1 and quantity will be Q1.