Market is a physical or an electronic platform through which buyers and sellers come together and exchange of goods or services takes place. Markets help organize economic activity by ensuring efficient allocation of resources (Slembeck). Mankiw’s, in his economic principles, asserts the role of markets in organizing economic activity. The same can be explained with an example of price ceiling on a basic utility market. The scenario taken is the government in a developing country, in an attempt to help the poor, sets a price ceiling for bread to make it more affordable. Since the price ceiling is to benefit the poor, it will definitely be set below the equilibrium price.
This disruption of the market equilibrium will have a few adverse effects to the economy. First, shortage of bread supply will be created due to increase in demand in response to price decrease and unwillingness of the suppliers to sell at the new price. Second, the sellers may have a tendency to hoard the bread and sell it in the black market at higher price. Third, the supplier may comprise with quality to maintain their profits. Fourth, people will have to wait in long queues to buy bread. Every hour spent in queue will amount to an hour of work loss and supply of work hours in the economy will decrease. The decrease in supply of work hours can reduce a firm’s production levels.
Overall, disruption of the market equilibrium poses a lot of problems to the economic development of a country. This explains Mankiw’s principle that markets organize the economy. Hence, rather than incorporating price ceiling markets should be allowed to act freely. The government can assist by empowering the people to comfortably buy their basic utilities.
Works Cited
Slembeck, Tilman. “Principles of Economics”. Slembeck.ch, 1 Oct. 2006. Web. 13 Jun 2012.
