Zim police warns dubious traders.
Harare the Zimbabwean police warned last Monday unscrupulous traders selling commodities at above the government stipulated prices that they risked being arrested if caught doing the unlawful act . police spokesperson inspector Cecilia Churu said that the police would not hasitate to arrest any retailer caught flouting the gazetted price.
The warning comes in the wake of unjustified price increase of mealie meal in the past two weeks by millers without the approval of the government.
You're required to:
Explain with an aid of diagram the effect of this form of government intervention on the price mechanisms
In order to explain the effect of government intervention on the price mechanisms, we can use a basic supply and demand diagram.
1. Start with a standard supply and demand diagram, with price (P) on the vertical axis and quantity (Q) on the horizontal axis.
2. Draw the supply curve (S) sloping upwards from left to right, indicating that as the price increases, the quantity supplied also increases.
3. Draw the demand curve (D) sloping downwards from left to right, indicating that as the price decreases, the quantity demanded increases.
4. The intersection of the supply and demand curves represents the equilibrium price (Pe) and quantity (Qe) in the absence of government intervention.
5. Now, assume that the government sets a maximum price ceiling below the equilibrium price in an attempt to control the prices set by unscrupulous traders.
6. Draw a horizontal line representing the maximum price ceiling (Pc) below the equilibrium price.
7. As a result of the price ceiling, the quantity demanded (Qd) will exceed the quantity supplied (Qs), creating a shortage in the market.
8. Draw a vertical line from the quantity demanded (Qd) to the supply curve (S) and find the corresponding price point on the supply curve.
9. The price point where the line intersects the supply curve is known as the theoretical price, which is the price that would ideally clear the market without government intervention.
10. Because the actual price is lower than the theoretical price, a black market might emerge as some traders are willing to sell at higher prices.
Overall, the government intervention in the form of setting a maximum price ceiling will lead to an imbalance between the quantity demanded and supplied, resulting in a shortage.