8 Feb 2021

"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?"

Divya Singh
8 Feb 2021

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