An Analysis Of Demand And Supply And The Price Control Essays Examples
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A CASE STUDY OF CANADA
Supply and demand is one of the fundamental economic concepts which form the backbone of the analysis of the concept of market economy. The economy of Canada is a free market economy. A free market economy is an economy where the decisions that concerns production, investment, distribution and consumption are based on the forces of demand and supply. The equilibrium prices of goods and services are determined by the free forces of demand and supply. The distinguishing characteristics of a free market economy are that the decision regarding production of goods and services and their allocation is mainly done by the negotiations of market participants. Canada is one of the free market economies in the world. Its economic freedom has a score above 79.1% which makes Canada the 6th freest market economy in the world..
The forces of demand and supply allow the movements of prices until equilibrium in the economy is set. When the demand and the supply are equal, equilibrium in the economy is established. This is where the demand function and the supply functions intersect. At this point of equilibrium there is the most efficient way of allocating goods and services since the amount of goods demanded is equals to the goods supplied and thus individuals and firms are all satisfied with these economic condition.
However, if allowed, these forces of demand and supply can sometimes push the prices of goods and services beyond the reach of most consumers. This therefore may force the governments to intervene in various forms in a measure to protect either the consumers or producer from the effects of extreme movements of prices. These interventions will also protect the local industries from undue competition of foreign goods. For example, although Canada is a free economy, its government has provided protection for the patent to prescription drugs. This protectionist measure has the effect of establishment of a monopoly for the local drug producers which is legal. So in contravention of the principle of free market economy Canada has also a provision to regulate the price of these local patented drugs. This price regulation that is opposed to market price setting is done through the government agencies. These agencies designs and provide guidelines that would prevent any exorbitant drug prices. However this price control on prescription drugs only applies to those with patents .
Government regulations of prices is a type of intervention where the governments and its agencies corrects ,inhibits, or distorts the process of free market mechanism by making policies and guidelines that sets the price of commodities. One of the mechanisms that that government regulates prices is setting of price ceiling and price floor. Price ceiling is a price control that is imposed by government or the limit on how high a price of a good or service cargo. The intentions of price ceiling are to protect consumers of goods and services from the exploitation of producers who could raise the prices of necessary commodities thus making them unattainable. In most scenarios, prices established through price ceilings are always set below market prices. Price ceiling that are set above the prevailing market price have no noticeable effects and only serve as preventative measure for future price increases. On the other hand, price ceiling that are set below market price will lead to a shortage of goods.
In Canada the government of Quebec State instituted a price ceiling to cap the price of gasoline although most people believed that this measure would affect the consumers negatively through reduced quantities of gasoline. The guidelines issued showed that the maximum price of gas and gasoline products would vary depending on the cost of a barrel of crude oil in the international oil markets. Similarly the governments agencies in Canada had also made some regulations with the aim of creating a price ceiling for certain drugs and the health planners at the provincial levels were to be responsible for negotiating with the drug manufacturers for a price. The fact that these planners would act on the basis of single-payer system, it made them to have considerable high monopsony power in the process of negotiating the prices. A Monopsony situation where there is only one single demander of a certain goods or services .
A price floor, on the other hand, is the introduced minimum price for which goods and services should be sold. Price floor, in most scenarios are set above the prevailing market price. Their main purpose is to protect the interest of sellers and producers. These policies are more common in agricultural products where sometimes prices are too low that that farmers cannot be able enough money from their production to support themselves and this may call for government to intervene and sets a price floor
Price ceiling have, nonetheless, numerous effects. Where price ceilings have been set the suppliers cannot charge the equilibrium price for their products. This, as a result may force some suppliers to leave the production of that particular product which will, in turn, reduces the quantity that is supplied in that market. On the other hand of demand, those individuals and firms demanding the product can obtain the same product it at a lower price as a result of price control. The results are that there is an increase in market demand for the product. The increased demand is because new buyers will emerge take advantage of the low price of goods and the existing buyers will tend to buy more due to the increase in the real income. This might result to imbalances in the market and the intended purposes of price control be eroded.
These effects of price control were very observable in Canada. Since Canada and the United States have similar demographics in terms of income and culture, there was a general assumption that the demand would be similar for the prescription drugs in both countries .but this was not the case because in Canada there exists price controls. The Drug companies from Canada took the advantage of the fact that the American Dachas a regulation that did not allow the importation of prescription drug but which the FDA which was to administer the law had since declined to implement.
This meant that US had no price control but Canada had. This created a space market segmentation for prescription along the international lines and the manufacturers of pharmaceutical drugs were able to act and practice as price discriminating monopolies. This, in effect, made the companies to divide their products into two segments which were the unregulated market which was the United States and the regulated market which was Canada .these monopolies priced their products in US based on the outcome of markets demand whereas the markets in Canada were constrained by the market controls. In Addition to this, the Provincial Health planners in Canada had a monopsony power of bargaining which created further downward pressure of the prices in Canada. This helped to maintain lower drug prices in Canada compared to the United States
According to if the effects of price ceilings are not well studies they can have a negative impact. He says that the efficiency of legislations on price ceiling on retail prices gasoline in the eight cities in Canada for eight years to 2007 demonstrate that such regulation on price ceiling is significantly correlated with high prices of gasoline in those regions. Results that were observable is that price ceilings was only acting as focal points where firms to set higher prices and the possibility of a regulatory loopholes were demonstrated.
Minimum Wage laws is One of the example of price floor .In this case, the suppliers of labor are the employees and the employer is the consumer of the labor. Unemployment tends to be created when the minimum wage is set above the equilibrium price that is prevailing in the market especially for unskilled labor where the people looking for jobs exceed the available jobs. The setting of the minimum wage that is above the prevailing market equilibrium wage would make the consumers of labor who are the employers to employ fewer workers. The same minimum wage laws would make more people to enter the job market. The result is that there will be excess labor available. In Canada the responsibilities of setting the minimum wage rest with the authorizes of the ten provinces while the federal governments sets the minimum wage for the laborers working in the federal jurisdiction industries such as the railways .
Eckert, A., & Eckert, H. (2014). Regional Patterns in Gasoline Station Rationalization in Canada. Journal of Industry, Competition and Trade, 122-149.
Foundation, T. H. (2015, February 15). Index of Economic Freedom. Retrieved from www.heritage.org: http://www.heritage.org/index/country/canada
Giberson, M. (2012). “Retail Gasoline Price Ceilings and Regulatory Capture: Evidence from Canada. American Law and Economics Review, 40-62.
Openshaw, M. S. (2005). The Economics of Prescription Drug Prices, Government Intervention and the Importation of Drugs From Canada. Ontario: Jannetti Publications, Inc.
Pope, C. (2013). Legislating Low Prices: Cutting Costs or Care? Heritage Foundation., 96-154.
Shields, & Simon. (2014). Wages, Holidays and Vacations. Ontario: Legal Guide.
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