Q.
a) Explain the difference between deflation and inflation. (10 marks)
b) "Government intervention in the economy can lower the price of goods". Explain. (10 marks)
(20 marks, 2019 Q4)
A.
a) Differences between deflation and inflation was asked in:
b) Government intervention to lower price.
There is additional topic necessary for this question. Price Ceiling and Price Floor.
Price Ceiling is setting a maximum price a product can be sold. This can be seen as controlled item - like face mask during this COVID-19 lock-down. Face mask cannot be sold more than a certain price see below.
Hence, in certain condition when stock is limited, there can be black market selling such masks above the price ceiling. In current time where there is shortage of stocks, retailers might not even want to sell any stock because it is not making money for them.
Another common control with price ceiling is rent. In some regions, the local authority set the price of accommodation called "Maximum Base Rent" system. This means rent cannot exceed this rate. Then, due to high demand, many accommodations are rented beyond this rate. The owners use the excuse of providing ancillary services to rent higher than the base rent. Ancillary services included things like cleaning services, security and further supports.
Price Floor is setting a Minimum Price a product can be sold. This is kind of impossible if the free market is allowed to take charge for supply and demand. Think about it, when price goes below a certain amount, the producer will limit the supply so that it will increase the price. However, at times, it is not possible without intervention.
For example, wages. When there are surplus of work force, the wages will decrease. This happened when influx of workers (especially illegals) are easily obtained. In history, this was more so during slavery and forced labour to the extreme far end of abuse of human rights.
Thus, the government introduced the minimal wage law where wages are set. In Malaysia, the Pakatan Harapan government has decided to raise the minimum monthly wage to RM1,200 in major towns under 57 city and municipality councils while the minimum wage remains at RM1,100 a month for the rest of the country, in Budget 2020.
This is an example of Price Floor.
Ref:
Earlier posts.