Who Determines the Prices of Goods in Market? Government or Free Forces of Market

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Our report focuses on how prices of commodities are determined in Pakistan; whether it is our government who determines the price or the equilibrium principle. The various factors influencing shifts in supply and demand and their effects on the market have also been discussed. Moreover the role of government and the reasons behind their intervention with regard to price determination has also been discussed in considerable detail.

To understand the market forces, it is imperative to first get an understanding of how the forces of demand and supply help to reach the equilibrium price level. After that we shall move on to describing the free market system and mixed economies.

Once the different aspects of prices and markets have been discussed, we shall discuss how the government intervenes. For this we shall focus on the price trends in Pakistan regarding commodities (we shell be using pulses as an example) and how traders and consumers have been affected by these interventions. Viewpoints of traders, consumers and government officials with reference to these policies have also been discussed and analyzed.

Demand, Supply and Equilibrium Price

Price is derived by the interaction of supply and demand. The resultant market price is dependant upon both of these fundamental components of a market. An exchange of goods or services will occur whenever buyers and sellers can agree on a price. When an exchange occurs, the agreed upon price is called the "equilibrium price", or a "market clearing price". This can be graphically represented as shown above. In the above figure, both buyers and sellers are willing to exchange the quantity "Q" at the price "P". At this point supply and demand are in balance or “equilibrium". At any price below P, the quantity demanded is greater than the quantity supplied. In this situation consumers would be anxious to acquire product the producer is unwilling to supply resulting in a product shortage. In order to ration the shortage consumers would have to pay a higher price in order to get the product they want; while producers would demand a higher price in order to bring more of the product to the market. The end result is a rise in prices to the point P, where supply and demand are once again in balance. Conversely, if prices were to rise above P, the market would be in surplus - too much supply relative to the demand. Producers would have to lower their prices in order to clear the market of excess supplies. Consumers would be induced by the lower prices to increase their purchases. Prices will fall until supply and demand are again in equilibrium at point P.

When either demand or supply changes, the equilibrium price will change. For example, good weather normally increases the supply of grains and oilseeds, with more product being made available over a range of prices. With no increase in the quantity of product demanded, there will be movement along the demand curve to a new equilibrium price in order to clear the excess supplies off the market. Consumers will buy more but only at a lower price. This can be illustrated graphically as follows: [pic]

Likewise a shift in demand due to changing consumer preferences will also influence the market price. With no reduction in supply, the effect on price results from a movement along the supply curve to a lower equilibrium price where supply and demand is once again in balance. In order for prices to increase producers will have to reduce the quantity of the product brought to the market place or find new sources of demand to replace the consumers who withdrew from the marketplace due to changing preferences or a shift in demand as illustrated in the following figure. [pic]

Changes in supply and demand can be short run or long run in nature. Weather tends to influence market prices generally in the short run. Changes in consumer preferences can have either a short run or long run effect on prices depending...
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