PRICE CONTROL/ LEGISLATION

WEEK NINE

PRICE CONTROL/ LEGISLATION

CONTENT

• Meaning
• Objectives
• Types (Minimum and Maximum)
• Effects of price control policy

PRICE CONTROL POLICY:

It is defined as a process by which the government or its agency fixes the price of essential commodities. That is, it is a situation where the government uses the instrument of law to fix the price of certain commodities.  It can be in the form of maximum or minimum price control. In Nigeria, price regulation or control on essential commodities is being carried out by the Price Control Board.

OBJECTIVES OF PRICE CONTROL POLICY

1. To prevent exploitation of consumers by producers.
2. To avoid or control inflation.
3. To help low income earners, eg minimum wage earners.
4. To control the profits of companies especially monopolists.
5. To prevent fluctuation of prices of some goods, eg agricultural produces
6. To stabilize the income of some producers, eg farmers.
7. To make possible planning for future output.

TYPES OF PRICE CONTROL POLICY

• Minimum Price Control Policy: is the lowest price by law, at which goods and services (labour and agricultural produces) can be bought. Buyers are allowed to offer a higher but not a lower price. The main purpose is to allow workers a certain level of income, especially during inflation and to protect agricultural producers against a fall in income due to bumper harvest.

A minimum price is usually above the equilibrium price and thus supply tends to be greater than demand, leading to excess supply and thus surplus, that ia increase in unemployment in the case of labour. It also leads to Black market in which people offer themselves for employment at a wage below the minimum price.                                                                

                              Wage Rate

                                          D         Excess Supply          S

                                P2

                                 P1

                                         S                                            D

                                     O             q2                   q3    Qty of labour

• Maximum Price Control Policy: is the highest price by law, at which goods and services can be sold. Sellers can sell at prices below it but not above it. The aim is to protect consumers, in general, and the poor community, in particular, especially during a period of rising prices.

A maximum price is usually below the equilibrium market price. Whereas this is agreeable to consumers, suppliers find it highly unsatisfactory. Therefore, demand for the commodity tends to be greater than the supply of it. This leads to excess demand and thus shortage of the commodity in the market. It also leads to Black market in which sales are made secretly, at higher prices to those who can afford it and, at the fixed price, to relatives and friends. Also, there will be rationing in which consumers are allowed specified quantities at regulated period of time.

  Price                 D                                S

                       P1

                       P2           

                                  S                                      D

                                          Excess Demand

                            O           q2                     q3    Qty

Effects of Price Control Policy

1. a) Hoarding of goods
2. b) Stimulation of demand i.e. excess demand, which cannot be satisfied.
3. c) Shortages of goods in the market
4. d) Queues for the good concerned
5. e) Black market dealing/under –counter sales
6. f) Reduction in supply
7. g) Rationing of the good
8. h) Favouritism, bribery and corruption

.

EVALUATION QUESTIONS

1. Explain how government policy and taxation can affect price determination.
2. What is the effect of maximum price control on the equilibrium price of a commodity?

Explain with a diagram.

READING ASSIGNMENT

Amplified and Simplified  Economics for SSS by Femi Longe Page 292-296

GENERAL EVALUATION QUESTIONS

1. Explain the term net migration.
2. Distinguish between a public company and public corporation.
3. What is trade by barter?
4. Identify the functions of money.
5. State the characteristics of money.

WEEKEND ASSIGNMENT

1. The gap between demand and supply curves below the equilibrium price indicates (a) excess demand (b) excess supply (c) equilibrium quantity (d) equilibrium price.
2. A minimum price control is usually set ……………. the  equilibrium price. (a) below (b) ahead (c) above (d) behind

3. Which of the following is not an advantage of price control (a) control of inflation (b) distortion of price mechanism (c) prevention of exploitation (d) control of producer’s profit especially monopoly.
4. When the price of a commodity is fixed by law either below or above  the equilibrium the mechanism is known as (a) price discrimination (b) equilibrium price (c) free market (d) price control.
5. ……………… is when consumers are allowed specified quantities of commodity at regulated period of time. (a) black market (b) hoarding (c) rationing (d) bargaining

SECTION B

1. Distinguish between minimum price control and maximum price control
2. List three objectives of price control.