Markets in action
YUN TANG 43101418
Abstract
Explain how do the price elasticity of demand and the price elasticity of supply impact magnitude of the impact from market intervention. Explain the reason and the method that government intervene the market price. Analysis the Chinese governments’ intervention and the unexpected outcomes on Chinese housing market in 2008 and 2010.
Keywords
Price elasticity of demand Price elasticity of demand Chinese housing market Government intervention
There are various ways for the government to intervene the market and the major way is to fix the price ,not setting a minimum price or setting a maximum price. Once the government fix the market price, there will be some differences both in demand and supply. When the price of a good rises , the quantity demand will fall while the quantity supply will rise, and vice versa. The price elasticity of demand and the price of elasticity can interpret the impact magnitude of the impact from market intervention. The price elasticity of demand equals percentage change in quantity demanded divides percentage change in price. The price elasticity of demand equals percentage change in quantity demanded divides percentage change in price. If we just ignore the sign and just concern about the value , the price elasticity of demand and the price elasticity of supply(as a symbol ε) can be classified into three types. When ε >1, it is elastic. When ε <1, it is inelastic. When ε = 1,it is unit elastic. By using the difference of total consumer expenditure(TE) and the total revenue(TR), it can tell the impact magnitude of the impact from market intervention. TE = P × Q . When it is elastic demand, if the price rises, quantity falls proportionately more and therefore TE falls. If the price falls, quantity rises proportionately more and therefore TE rises. On the contract, when it is inelastic demand, TE changes in the same direction as price. Based on some situation , the government need to take actions to impact the market for diversity reasons. For instance, the government may set a minimum price to protect the producers’ incomes and prevent the wages of labors in special industry from falling below a certain level. What’s more, the government may set a maximum price to make sure the price won’t rise so dramatically that the citizen can not afford the necessary needs. In addition, the government may add additional tax on particular goods just for create a tax income for the government. Last but not the least, the government may issue specific policy such as limit the approval of the suppliers or the customers to change the market price. Take the Chinese housing market in two different period when the government took different methods for example. Because of the significantly rising price of the house in china from 2007, the government starts to public some policy in order to control the price of property by the request of the public. Figure1:Data sources: National Development and Reform Commission: National bureau of statistics. From the above figure, it is easy to find out that during 2008,the price of house in china dropped dramatically while after 2010, the price increased enormously. Actually ,both in 2008 and 2010, the government issued different policy to make the price of property drop. However, in 2008, the government made the goal while in 2010,it failed. To begin with, let us discuss the case in 2008. First of all ,In order to stop the rapidly increasing housing price tend, People’s Bank of China abolish the preferential policy for housing loans and raise the mortgage interest rates in commercial banks. Secondly, tougher measures required that the ratio of the houses with gross floor area of less than 90 square meters to the total constructed houses shall not be less than 70%. Houses with bigger floor areas than
