"Shortages, price controls, and queuesDuring the late 1980s and early 1990s, economic reforms initiated by Soviet president Mikhail Gorbachev began to raise consumer incomes; however, the Soviet government continued to impose price ceilings on basic goods like food, clothing, and household goods. As higher income led to increased demand, severe shortages of many goods and long lines at all kinds of stores became common. Finally, in January 1992, a new Russian government under president Boris Yeltsin removed retail price controls on most goods. Within a month, prices more than doubled on average, and lines disappeared. Analyze these events using the supply and demand model. First draw a supply and demand diagram for some normal good such as butter. Show the market in equilibrium at a price of 1 ruble per kilo before the beginning of the Gorbachev reforms. Draw a horizontal line at that level to represent the price ceiling; no butter can be sold for more than 1 ruble per kilo. Next show the effect of rising income. Does it shift the supply curve? Does it shift the demand curve? What is the shortage or surplus at the controlled price? After the price control ends, assuming no further shift in the supply and demand curve, what happens to the price? What happens to the shortage or surplus?"
"Shortages, price controls, and queuesDuring the late 1980s and early 1990s, economic reforms initiated by Soviet president Mikhail Gorbachev began to raise consumer incomes; however, the Soviet government continued to impose price ceilings on basic goods like food, clothing, and household goods. As higher income led to increased demand, severe shortages of many goods and long lines at all kinds of stores became common. Finally, in January 1992, a new Russian government under president Boris Yeltsin removed retail price controls on most goods. Within a month, prices more than doubled on average, and lines disappeared. Analyze these events using the supply and demand model. First draw a supply and demand diagram for some normal good such as butter. Show the market in equilibrium at a price of 1 ruble per kilo before the beginning of the Gorbachev reforms. Draw a horizontal line at that level to represent the price ceiling; no butter can be sold for more than 1 ruble per kilo. Next show the effect of rising income. Does it shift the supply curve? Does it shift the demand curve? What is the shortage or surplus at the controlled price? After the price control ends, assuming no further shift in the supply and demand curve, what happens to the price? What happens to the shortage or surplus?"
