At the price of K5.00, demand and supply is 40 million. Assume the government sets a price of K6.00 per litter, where demand is 35 million and supply is 45 million.
What will be the effect on the level of consumer expenditure?
The effect on consumer expenditure will depend on whether the government imposes a price ceiling or a price floor.
If the government sets a price ceiling of K6.00 per liter (meaning they are capping the price at this level), consumers will benefit because they will be paying a lower price than they would in the market equilibrium. In this case, consumer expenditure will decrease because consumers will be paying less for the same quantity of goods.
On the other hand, if the government sets a price floor of K6.00 per liter (meaning they are setting a minimum price that sellers can charge), consumers will be negatively impacted because they will have to pay more for the same quantity of goods. In this case, consumer expenditure will increase because consumers will be paying more for the same quantity of goods.
Overall, the effect on consumer expenditure will depend on whether the government sets a price ceiling or a price floor.
Assume the product is petrol, estimate the volume of petrol the government would buy from the firm.
If the government sets a price of K6.00 per liter for petrol and demand is 35 million liters, and supply is 45 million liters, there will be excess supply in the market. This means that the government would need to purchase the surplus supply to maintain the price floor.
To estimate the volume of petrol the government would need to buy from the firm, we can calculate the difference between the supply and demand at the price floor:
Excess supply = Supply - Demand
Excess supply = 45 million - 35 million
Excess supply = 10 million liters
Therefore, the government would need to buy 10 million liters of petrol from the firm to maintain the price floor of K6.00 per liter.