Welcome to my blog! In the last two blogs we talked about demand and supply, and the factors which will affect them. In this blog, we will firstly talk about price mechanism.

Price mechanism is a market mechanism that guides decisions taken by different producers and consumers about how scarce resources should be allocated between competing uses. What lead by price mechanism is the equilibrium price, It is the price at which the amount supplied equals or satisfies the amount demanded. We can simply find that from the graph, which shows by the intersect point of the demand and supply curve.

Government always try to interfere the market in order to get a better allocation of resources. the most common thing they would do is to impose tax on goods and services. Like we mentioned before, tax will influence the demand and supply. The increase in direct tax, which is a tax levied on the incomes or wealth of individuals or firms, will cause the decrease in demand. the increase in indirect tax, which is a tax levied on goods and services, will cause the decrease in supply. In the second situation, the indirect tax is not only burden by producer. As you can see from the graph, the upper part is burdened by consumer, and the other part is burdened by producer. Dead weight loss is showed by this little triangle. At this time, what burdened by producer seems outweigh by what burdened by consumer, that because the price elasticity of supply is lower than the price elasticity of demand. The more elastic of the demand, the lower tax that consumer will need to burden. The more elastic of the supply, the lower tax that producer will need to burden. vice versa

Government will also set price celling and price floor to control the market price celling is usually below the equilibrium price, which will defiantly lead to the decrease in market price. Government use prices celling to reduce the market price. Price floor is usually upper the equilibrium price, which will lead to the increase in market price. Government use that to increase the market price. When experiencing the market celling, it is always facing the situation of shortage, which is the quantity of demand is exceed the quantity of supply. When it turn to the price floor, it is always facing the situation of surplus, which is the quantity of supply exceed the quantity of demand.

Another thing government may do is to imposing quota or subsidy. Quota is a type of trade restriction that sets a physical limit on the quantity of a good that can be produced or purchased in a given period of time. If there is a quota below the current quantity supply, the equilibrium price will increase. Subsidy is a form of financial aid or support extended to an economic sector generally with the aim of promoting economic and social policy. Subsidy will also be burdened by both consumers and producers, and lead to dead weight loss.