Controlling Supply: Government Intervention & Market Forces

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  • 0:02 Why Control Supply?
  • 0:51 Market Forces
  • 2:08 Government Controls
  • 3:48 Breaking the Law
  • 4:56 Lesson Summary
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Lesson Transcript
Instructor: Kevin Newton

Kevin has edited encyclopedias, taught history, and has an MA in Islamic law/finance. He has since founded his own financial advice firm, Newton Analytical.

Sometimes, despite the best efforts of the market, a heavy hand is needed to control supply. This lesson looks at how the government and the market can work to do just that.

Why Control Supply?

Imagine for a second that you are living in a city that is being hit by a massive blizzard. You've already gotten the next few days out of work or school, so after the understandable celebration, you head to your favorite grocery store to pick up food, knowing that you could very well lose the ability to leave home. However, you walk in and the store is absolutely bare, except for a growing crowd of worried people. Angriest of all is the store manager, upset that she missed the opportunity to make some real profits in the lead up to the storm.

Repeat this scene across a whole region, and chances are you'll have pandemonium in the streets and a few grocery store managers leading the charge. Controlling the supply of goods is of utmost interest to both producers and the government, as you can gather from above. However, what about those goods that should be restricted?

Market Forces

Shortages are normally a bad thing for market forces, because they mean that the economy is not working at full efficiency. However, sometimes the producers themselves impose the shortages, especially in cases where the demand of a good is particularly inelastic.

Take diamonds, for example. A diamond costs, on average, twenty times the cost of any other gemstone. In fact, diamonds are more abundant than many other gems. However, due to the work of the world's largest diamond producers, there has been an imposed shortage of diamonds for more than 100 years. This means that prices have remained artificially high, leading to the great chagrin of those planning to propose.

However, what about those companies that are interested in selling as much of a good as possible? For them, controlling supply isn't enough; they must expand it. This is especially true with food, where there is always an increasing demand. Food manufacturers, as a result, have become remarkably efficient through constant innovations in increasing supply. In fact, conservative estimates say that we can feed 2 billion more people today than we could 80 years ago just because of work done on wheat.

Government Controls

Food supplies are understandably a great example of maintaining supply because, as we saw earlier, it's in everybody's best interest to maintain a constant and sufficient supply of food. That's why a scenario like the opening of this lesson would likely not last. In fact, in cases where storms have proven to be worse than expected, governments use their resources to ensure that the population is fed. Think about the images of National Guard units bringing necessities to victims of a tragedy and you've got the idea.

But government involvement in prices doesn't only apply to disasters. Through subsidies, or money paid directly to producers to encourage production of certain goods, many governments choose to heavily encourage farmers to produce more food. This happens around the world. Further, some countries put limits on the price of food, keeping it below a certain point. This is referred to as a price ceiling. One place where this continues today is in Egypt, where bakers receive subsidies to produce cheap bread that is sold at a low price to everyone.

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