Two friends were discussing the government intervention in the market by fixing prices. Arushi said that market oriented prices are different form price ceiling and price floor. Anisha disagreed. What do you think?
Answer & explanation
Correct answer: option 3
The correct answer is option 3: Arushi is totally correct
- Market-oriented prices are determined by the forces of demand and supply without government intervention.
- Price ceiling (maximum price) and price floor (minimum price) are government-imposed price controls that interfere with the free market mechanism.
- Since price ceilings and price floors distort market equilibrium, they are fundamentally different from market-oriented prices, which allow prices to adjust naturally.
Why is Anisha incorrect?
- Anisha disagreed, implying that market prices are not different from price controls.
- However, market-determined prices fluctuate freely based on supply and demand, whereas price ceilings and price floors artificially restrict price movement.