If changes in demand and supply are equal, elasticity is equal to one and the curve is said to be elastic. If the changes in price are greater than changes in quantity, elasticity is less than one and is said to be inelastic (Investopedia, 2009). Monopolies A monopoly is a market economy where there is only one producer and supplier of a product. In such a market, the prices of products can be dictated by the leaving the consumer with no choice and therefore utility cannot be maximized. Market entry in such a structure becomes difficult as there impediments such as high costs involved.
A government may create a monopoly in an industry such as the energy sector so that it has exclusive authority to control it. In a competitive market economy, there are several producers competing to satisfy the needs of consumers. This allows price changes to be determined by market forces such as changes in supply and demand. In such a market both consumers and producers participate in product price determination (Norton, 2008). Government intervention When market equilibrium becomes unfair, the government might intervene to correct any anomalies in the equilibrium.
Such interventions might include declaring a ban on the production and consumption of particular products. Government can intervene through price ceilings and price floors. A price ceiling sets a maximum limit that a product can be charged in the market. As shown in figure1, the ceiling price is set at PCE below the equilibrium price. As a result the quantity demanded becomes greater then the quantity supplied resulting into a shortage. A price floor refers to the minimum limit that a product can be charged.
This is shown by PFL in figure1 and is set above the equilibrium price resulting into a surplus (Eisenkolb, n. d). Conclusion Supply and demand plays a central in price determination in any economy. In order to have a free market economy, monopolies and intervention from the government should be limited in order for the market forces to determine automatically the price of products that is acceptable to both the consumer and the producer. However, the government should only intervene to ensure the supply and demand laws are adhered to and to bring product prices as close as possible to the equilibrium price.
Eisenkolb, H. (n. d). The Law of Supply and Demand. Retrieved March 7, 2009 from http://ourworld. compuserve. com/homepages/ruetten/supply. htm. Investopedia (2009). Economics Basics: Demand and Supply. Retrieved March 7, 2009 from http://www. investopedia. com/university/economics/economics3. asp. Norton, K. J. (2008). Microeconomics – Understand the Law of Demand and Supply. Retrieved March 7, 2009 from http://ezinearticles. com/? Microeconomics—Understand-the-Law-of-Demand-and-Supply&id=1592955.