What are the implications if the government started to contr

What are the implications if the government started to control prices for products, how would this influence buying?

Solution

If government decides to control prices for products or decides to fix prices of products then such action of government can have serious or considerable implication on market behavior.

However, implications will depend on the level of price being fixed by the government. If government fixes the price above the equilibrium price prevailing in market then there would be no impact in market for respective products and trade would remain continue at equilibrium price. No impact on either buying and selling will be there.

On the other hand, if government fixes the price below the equilibrium level then in such case lower price will encourage the buyers to increase the demand for good while sellers will be induced to lower the supply of good.

This will create a situation where quantity demanded will be greater than quantity supplied leading to creation of shortage.

This situation of shortage in market due to price control being excercised by government will encourage the black marketing or illegal trading of products.

In a sense, legal buying will be replaced by illegal buying.

So, price control being excercised by government will increase the quantity demanded of good but shortage created by it will lower the actual buying.

In other words, actual buying in legal sense will decrease while illegal buying will thrive.