Zimbabwe police warns dubious traders. Harare the Zimbabwean police warned last Monday unscrupulous traders selling commodities at the above stipulated prices that they risked being arrested if caught doing unlaw act. Police spoke person inspector,Cecilia church said that police would not hesitate 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 government. Explain with the aid of a diagram the effect of this form of government intervention on the price mechanism
The form of government intervention described in the scenario is price control. The government has set a specific price for commodities, and retailers who are caught selling above this price face the risk of being arrested.
To illustrate the effect of this intervention on the price mechanism, we can use a simple diagram of supply and demand.
The diagram below shows the initial supply and demand curves for a commodity such as mealie meal. The equilibrium price is P1, and the corresponding quantity is Q1.
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S1 /\
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S0 / |
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Q0 Q1 Quantity
When millers increase the price of mealie meal without government approval, the supply curve shifts to the left, as shown by S0 shifting to S1. This is because the sellers are now offering the same quantity of mealie meal at a higher price.
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S1 /\
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S0' / | S0
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Q0 Q1 Quantity
As a result of the price increase, there is now a surplus of mealie meal in the market. The quantity supplied at the higher price (Q1) exceeds the quantity demanded at that price.
In response to the unjustified price increase, the government intervenes and sets a maximum price for mealie meal. This creates a price ceiling, as indicated by the horizontal line at P2.
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S1 /\
P2 / | S0
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| D
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Q0 Q1 Quantity
At the government-set price ceiling, the quantity demanded (Q3) exceeds the quantity supplied (Q2). This creates a shortage, as there is more demand for mealie meal at the lower price than the quantity supplied at that price.
Overall, by implementing a price control, the government aims to ensure that consumers can purchase essential goods at an affordable price. However, in this case, the price control may lead to a shortage of mealie meal in the market, as suppliers may be discouraged from producing or selling the product at the government-set price.