What is the effect of determining price by law rather than market forces? | Yahoo Answers
Oath and all of its brands listed in Section 13 (including Yahoo and AOL brands) and the U.S. USERS: THESE TERMS CONTAIN A BINDING ARBITRATION .. payment information and you have the continuing obligation to keep it up to date. takes effect constitutes your agreement to pay the new price for the Service. Main · Videos; Pharmaton capsules yahoo dating. But what towers a housedress strap her roles is something that gushy man forwards to possess. Wearable. Laws enacted by the government to regulate prices are called price controls. Price controls come in two flavors. A price ceiling keeps a price from rising above a.
In this case, the price ceiling has a measurable impact on the market. A price ceiling set below the free-market price has several effects.
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Suppliers find they can no longer charge what they had been charging for their products. As a result, some suppliers drop out of the market. This represents a reduction in the quantity supplied. Meanwhile, demanders find that they can now buy the same product at a lower price. As a result, market demand increases as new buyers enter the market and existing buyers consume more of the good.
As a result of these two actions, demand exceeds supply and a shortage ensues. The good must then be rationed by non-market means, such as waiting in line.
Price ceilings are often intended to protect consumers from certain conditions that could make necessities unattainable. But they can also cause problems if they are used for a prolonged period of time without controlled rationing.
No markets exist at any future dates. Third, suppose contracts specify states of nature which affect whether a commodity is to be delivered: This new definition of a commodity allows one to obtain a theory of [risk] free from any probability concept So the complete Arrow-Debreu model can be said to apply when goods are identified by when they are to be delivered, where they are to be delivered, and under what circumstances they are to be delivered, as well as their intrinsic nature.
So there would be a complete set of prices for contracts such as "1 ton of Winter red wheat, delivered on 3rd of January in Minneapolis, if there is a hurricane in Florida during December". A general equilibrium model with complete markets of this sort seems to be a long way from describing the workings of real economies, however its proponents argue that it is still useful as a simplified guide as to how a real economies function.
Some of the recent work in general equilibrium has in fact explored the implications of incomplete markets, which is to say an intertemporal economy with uncertainty, where there do not exist sufficiently detailed contracts that would allow agents to fully allocate their consumption and resources through time. While it has been shown that such economies will generally still have an equilibrium, the outcome may no longer be Pareto optimal. The basic intuition for this result is that if consumers lack adequate means to transfer their wealth from one time period to another and the future is risky, there is nothing to necessarily tie any price ratio down to the relevant marginal rate of substitution, which is the standard requirement for Pareto optimality.
However, under some conditions the economy may still be constrained Pareto optimal, meaning that a central authority limited to the same type and number of contracts as the individual agents may not be able to improve upon the outcome - what is needed is the introduction of a full set of possible contracts. Hence, one implication of the theory of incomplete markets, is that inefficiency may be a result of underdeveloped financial institutions or credit constraints faced by some members of the public.
Research still continues in this area. The technical condition for the result to hold is the fairly weak one that consumer preferences are locally nonsatiated, which stipulates that there is always a preferable level of consumption, arbitrarily close to any given level of consumption. Additional implicit assumptions are that consumers are rational, markets are complete, there are no externalities and information is perfect.
While these assumptions are certainly unrealistic, what the theorem basically tells us is that the sources of inefficiency found in the real world are not due to the decentralized nature of the market system, but rather have their sources elsewhere. However, the Second Theorem states that every efficient allocation can be supported by some set of prices. In other words all that is required to reach a particular outcome is a redistribution of initial endowments of the agents after which the market can be left alone to do its work.
This suggests that the issues of efficiency and equity can be separated and need not involve a trade off. However, the conditions for the Second Theorem are stronger than those for the First, as now we need consumers' preferences to be convex convexity roughly corresponds to the idea of diminishing marginal utility, or to preferences where "averages are better than extrema".
To guarantee that an equilibrium exists we once again need consumer preferences to be convex although with enough consumers this assumption can be relaxed both for existence and the Second Welfare Theorem.
Similarly, but less plausibly, feasible production sets must be convex, excluding the possibility of economies of scale. Proofs of the existence of equilibrium generally rely on fixed point theorems such as Brouwer fixed point theorem or its generalization, the Kakutani fixed point theorem.
For this reason many mathematical economists consider proving existence a deeper result than proving the two Fundamental Theorems. While the issues are fairly technical the basic intuition is that the presence of wealth effects which is the feature that most clearly delineates general equilibrium analysis from partial equilibrium generates the possibility of multiple equilibria.
What is the effect of determining price by law rather than market forces?
When a price of a particular good changes there are two effects. First, the relative attractiveness of various commodities changes, and second, the wealth distribution of individual agents is altered. These two effects can offset or reinforce each other in ways that make it possible for more than one set of prices to constitute an equilibrium.
A result known as the Sonnenschein-Mantel-Debreu Theorem states that the aggregate excess demand function inherits only certain properties of individual's demand functions, and that these Continuity, Homogeneity of degree zero, Walras' law, and boundary behavior when prices are near zero are not sufficient to restrict the admissible aggregate excess demand function in a way which would ensure uniqueness of equilibrium.
There has been much research on conditions when the equilibrium will be unique, or which at least will limit the number of equilibria.
One result states that under mild assumptions the number of equilibria will be finite see Regular economy and odd see Index Theorem. Furthermore if an economy as a whole, as characterized by an aggregate excess demand function, has the revealed preference property which is a much stronger condition than revealed preferences for a single individual or the gross substitute property then likewise the equilibrium will be unique.
All methods of establishing uniqueness can be thought of as establishing that each equilibrium has the same positive local index, in which case by the index theorem there can be but one such equilibrium.
This means that comparative statics can be applied as long as the shocks to the system are not too large. As stated above in a Regular economy equilibria will be finite, hence locally unique. One reassuring result, due to Debreu, is that "most" economies are regular. However recent work by Michael Mandler has challenged this claim. The Arrow-Debreu-McKenzie model is neutral between models of production functions as continuously differentiable and as formed from linear combinations of fixed coefficient processes.
Mandler accepts that, under either model of production, the initial endowments will not be consistent with a continuum of equilibria, except for a set of Lebesgue measure zero. However, endowments change with time in the model and this evolution of endowments is determined by the decisions of agents e.
Agents in the model have an interest in equilibria being indeterminate: Since arbitrary small manipulations of factor supplies can dramatically increase a factor's price, factor owners will not take prices to be parametric. Supporters have pointed out that this aspect is in fact a reflection of the complexity of the real world and hence an attractive realistic feature of the model. But this raises the question of how these prices and allocations have been arrived at and whether any temporary shock to the economy will cause it to converge back to the same outcome that prevailed before the shock.
This is the question of stability of the equilibrium, and it can be readily seen that it is related to the question of uniqueness. If there are multiple equilibria then some of them will be unstable. Then, if an equilibrium is unstable and there is a shock, the economy will wind up at a different set of allocations and prices once the converging process completes.
However stability depends not only on the number equilibria but also on the type of the process that guides price changes for a specific type of price adjustment process see Tatonnement. Consequently some researchers have focused on plausible adjustment processes that will guarantee system stability, that is, prices and allocations always converging to some equilibrium, though when there exists more than one, which equilibrium it is will depend on where one begins.
The Sonnenschein-Mantel-Debreu results show that, essentially, any restrictions on the shape of excess demand functions are stringent. Some think this implies that the Arrow-Debreu model lacks empirical content. At any rate, Arrow-Debreu-McKenzie equilibria cannot be expected to be unique, or stable. A model organized around the tatonnement process has been said to be a model of a centrally planned economy, not a decentralized market economy.
Some research has tried, not very successfully, to develop general equilibrium models with other processes. In particular, some economists have developed models in which agents can trade at out-of-equilibrium prices and such trades can affect the equilibria to which the economy tends. Particularly noteworthy are the Hahn process, the Edgeworth process, and the Fisher process. The data determining Arrow-Debreu equilibria include initial endowments of capital goods.
If production and trade occur out of equilibrium, these endowments will be changed further complicating the picture. In a real economy, however, trading, as well as production and consumption, goes on out of equilibrium.
It follows that, in the course of convergence to equilibrium assuming that occursendowments change.
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In turn this changes the set of equilibria. Put more succinctly, the set of equilibria is path dependent What matters is the equilibrium that the economy will reach from given initial endowments, not the equilibrium that it would have been in, given initial endowments, had prices happened to be just right Franklin Fisher, as quoted by Petri The Arrow-Debreu model of intertemporal equilibrium, in which forward markets exist at the initial instant for goods to be delivered at each future point in time, can be transformed into a model of sequences of temporary equilibrium.
Sequences of temporary equilibrium contain spot markets at each point in time. Although the Arrow-Debreu-McKenzie model is set out in terms of some arbitrary numeraire, the model does not encompass money.
Frank Hahn, for example, has investigated whether general equilibrium models can be developed in which money enters in some essential way. The goal is to find models in which existence of money can alter the equilibrium solutions, perhaps because the initial position of agents depends on monetary prices.
Some critics of general equilibrium modeling contend that much research in these models constitutes exercises in pure mathematics with no connection to actual economies. Georgescu-Roegen cites as an example a paper that assumes more traders in existence than there are points in the set of real numbers. Although modern models in general equilibrium theory demonstrate that under certain circumstances prices will indeed converge to equilibria, critics hold that the assumptions necessary for these results are extremely strong.
As well as stringent restrictions on excess demand functions, the necessary assumptions include perfect rationality of individual complete information about all prices both now and in the future; and the conditions necessary for perfect competition. However some results from experimental economics suggest that even in circumstances where there are few, imperfectly informed agents, the resulting prices and allocations often wind up resembling those of a perfectly competitive market.
Frank Hahn defends general equilibrium modeling on the grounds that it provides a negative function. General equilibrium models show what the economy would have to be like for an unregulated economy to be Pareto efficient. However, with advances in computing power, and the development of input-output tables, it become possible to model national economies, or even the world economy, and solve for general equilibrium prices and quantities under a range of assumptions.
General Competitive Analysis, San Francisco: Theory of Value, New York: A Dictionary of Economics, v. Dilemmas in Economic Theory: Persisting Foundational Problems of Microeconomics, Oxford: A Dictionary of Economics,v.
General Equilibrium, Capital, and Macroeconomics: For a price ceiling to be effective, it must differ from the free market price. In the graph at right, the supply and demand curves intersect to determine the free-market quantity and price.Minimum wage and price floors - Microeconomics - Khan Academy