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Introduction Our report focuses on how prices of commodities are determined in Pakistan; whether it is our government who determines the price or the equilibrium principle. The various factors influencing shifts in supply and demand and their effects on the market have also been discussed. Moreover the role of government and the reasons behind their intervention with regard to price determination has also been discussed in considerable detail. To understand the market forces, it is imperative to first get an understanding of how the forces of demand and supply help to reach the equilibrium price level.
After that we shall move on to describing the free market system and mixed economies. Once the different aspects of prices and markets have been discussed, we shall discuss how the government intervenes. For this we shall focus on the price trends in Pakistan regarding commodities (we shell be using pulses as an example) and how traders and consumers have been affected by these interventions. Viewpoints of traders, consumers and government officials with reference to these policies have also been discussed and analyzed.
Demand, Supply and Equilibrium Price [pic] Price is derived by the interaction of supply and demand. The resultant market price is dependant upon both of these fundamental components of a market. An exchange of goods or services will occur whenever buyers and sellers can agree on a price. When an exchange occurs, the agreed upon price is called the “equilibrium price”, or a “market clearing price”. This can be graphically represented as shown above. In the above figure, both buyers and sellers are willing to exchange the quantity “Q” at the price “P”.
At this point supply and demand are in balance or “equilibrium”. At any price below P, the quantity demanded is greater than the quantity supplied. In this situation consumers would be anxious to acquire product the producer is unwilling to supply resulting in a product shortage. In order to ration the shortage consumers would have to pay a higher price in order to get the product they want; while producers would demand a higher price in order to bring more of the product to the market.
The end result is a rise in prices to the point P, where supply and demand are once again in balance. Conversely, if prices were to rise above P, the market would be in surplus – too much supply relative to the demand. Producers would have to lower their prices in order to clear the market of excess supplies. Consumers would be induced by the lower prices to increase their purchases. Prices will fall until supply and demand are again in equilibrium at point P. When either demand or supply changes, the equilibrium price will change.
For example, good weather normally increases the supply of grains and oilseeds, with more product being made available over a range of prices. With no increase in the quantity of product demanded, there will be movement along the demand curve to a new equilibrium price in order to clear the excess supplies off the market. Consumers will buy more but only at a lower price. This can be illustrated graphically as follows: [pic] Likewise a shift in demand due to changing consumer preferences will also influence the market price.
With no reduction in supply, the effect on price results from a movement along the supply curve to a lower equilibrium price where supply and demand is once again in balance. In order for prices to increase producers will have to reduce the quantity of the product brought to the market place or find new sources of demand to replace the consumers who withdrew from the marketplace due to changing preferences or a shift in demand as illustrated in the following figure. [pic]
Changes in supply and demand can be short run or long run in nature. Weather tends to influence market prices generally in the short run. Changes in consumer preferences can have either a short run or long run effect on prices depending upon the goods or services, for example whether they are luxuries or necessities. A luxury good may enjoy a short term shift in demand due to changing styles or snob appeal while necessities tend to have stable or long run demand curves. Another major factor influencing market prices is technology.
A major effect of technology in agriculture is to shift out the supply curve rapidly by reducing the costs of production on a per unit basis. At the same time if total demand does not increase sufficiently to absorb the excess goods produced at lower costs, the long run impact of technology on the market place will be to lower prices. The rapidly shifting supply curve coupled with a slower moving demand curve has generally contributed to lower prices for agricultural output when compared to prices for industrial products. FREE MARKET
The law of supply and demand predominates in the ideal free market, influencing prices toward an equilibrium that balances the demands for the products against the supplies. At these equilibrium prices, the market distributes the products to the purchasers according to each purchaser’s preference (or utility) for each product and within the relative limits of each buyer’s purchasing power. In the marketplace the price of a good or service helps communicate consumer demand to producers and thus directs the allocation of resources toward consumer, as well as investor, satisfaction.
This equilibrium of free markets makes certain assumptions about their agents, for instance that they act independently. Some models have shown that when agents are allowed to interact locally in a free market (i. e. their decisions depend not only on utility and purchasing power, but also on their peers’ decisions), prices can become unstable and diverge from the equilibrium, often in an abrupt manner. Speculation bubbles and the type of herd behavior often observed in stock markets are quoted as real life examples of non-equilibrium price trends.
Free-market advocates often dismiss this theory, and blame external influences, such as weather, commodity prices, technological developments, and government meddling for non-equilibrium prices. Market equilibrium is determined by the aggregate of buyers and sellers and does not normally result in unique pricing. Free markets contrast sharply with controlled markets or regulated markets, in which governments directly or indirectly regulate prices or supplies, distorting (according to free market theory) market signals. Reasons for Government Intervention in the Market
Government intervention in the market sets out to attain two goals: social efficiency and equity. Social efficiency is achieved at the point where the marginal benefits to society for either production or consumption are equal to the marginal costs of either production or consumption. Issues of equity are difficult to judge due to the subjective assessment of what is, and what is not, a fair distribution of resources. Following are the ways through which the government intervenes in the market and avoid the pitfalls (also mentioned below).
Taxes and subsidies are one means of correcting market distortions. Externalities can be corrected by imposing tax rates equal to the size of the marginal external cost, and granting rates of subsidy equal to marginal external benefits. The government may spread awareness and ensure that the market provide information (at a price) to the people, for ignorance and uncertainty may prevent people from consuming or producing at the levels they would otherwise choose. Regulatory bodies can be set up to monitor and control activities that are against the public interest (e. . anti-competitive behavior of oligopolists). They can conduct investigations of specific cases, but these may be expensive and time consuming, and may not be acted on by the authorities. The government may provide goods and services directly. These could be either public goods or other goods where the government feels that provision by the market is inadequate. The government could also influence production in publicly owned industries. Pakistan: A Mixed Economy A mixed economy is an economic system that incorporates aspects of more than one economic system.
This usually means an economy that contains both privately-owned and state-owned enterprises or that combines elements of capitalism and socialism, or a mix of market economy and planned economy characteristics. After various experimentations with the economic system of Pakistan, the country has now settled down for a system that incorporates almost a mix of all economies and hence branding it with the name of ‘mixed economy’. The relevant aspects of this economy include: a degree of private economic freedom (including privately owned industry) intermingled with centralized economic planning (which may include intervention for nvironmentalism and social welfare, or state ownership of some of the means of production). There is not a consensus on which economies are capitalist, socialist, or mixed. It may be argued that the historical tendency of power holders in all times and places to limit the activities of market actors combined with the natural impossibility of monitoring and constraining all market actors has resulted in the fact that, as we understand a “mixed economy” being a combination of governmental enterprise and free-enterprise, nearly every economy to develop in human history meets this definition.
Likewise, private investment, freedom to buy, sell, and profit, combined with economic planning by the state, including significant regulations (e. g. wage or price controls); taxes, tariffs, and state-directed investment are also important aspects of the Pakistani economy. Who decides the prices of commodities in Pakistani markets? To keep it simple, we have marked out pulses from the long list of the commodities as pur example on which we shall base all of our arguments. The Pakistani economy is an open economy and can be categorized under the heading of a mixed economy.
Basically, like every other market place, the price is determined by the market forces of demand and supply, but these are greatly influenced and checked upon by the government (at a district level). Primarily, the commodities initially come to the mandi (whole sale market) where the price is determined on the basis of demand and supply (and keeping in view the greatly fluctuating transformational costs due to the shifts in oil prices). It is from here that the retailers buy the commodities and after marking out the profit margin, sets the price for the consumer.
It is here that the government intervenes. The DCO (District Coordination Officer), with the help of Magistrates (1st class), keeps a check on the selling prices both at the mandi level and at the retailer stores as well. The Price Setting Mechanism The price of commodities are basically determined by the demand and supply principles in the market and fixed by the District Coordination Officer. The process of fixing the price is done by the market committee (which comprises of selection of elected and/or appointed whole-sellers of various ommodities, as well as few consumers), where they set the price of the commodities after determining the cost of the goods coming from the producer and calculating the freight cost. Then comes in the whole sellers, who buy the commodities and set the market price depending upon the demand of the market. The price of perishables items such as vegetables are determined on daily basis, where as the prices of commodities such as pulses are determined at an appropriate interval or whenever the market determinants indicate a necessity for price change.
The District Coordination Officer after convening with the market officials and the concerned government departments officials fixes the prices of commodities in light of the food ordinance and price control acts. CPI Data The consumer price index during the month of March 2008 increased by 3. 08% over February 2008 and increased by 14. 12% over corresponding month of last year as shown in the table below: [pic] [pic] [pic] The Magisterial System In our market, where everyone wants to have as much profits as possible, we get blinded by the lure of money and start charging as much as possible.
After the heaves and cry of the masses the government is forced to take action and sends its civil machinery to check out the actual market situation. As per government law the traders are obligated to display the rate lists of all the goods and commodities. The DCO has a direct authority to check, intervene and if necessary, fix the price of the commodity own his own (though this is done very rarely). The DCO is backed up by the Magistrates (first class), who actually go down into the field and check upon the prices of the commodities.
At times, magistrates also send in people in plain clothes to check out if the rate lists are implemented. The price control mechanism was initiated by the British in the government of India Act of 1935’s. This rule continued up to 2001 when it was suspended on the belief that the system was a legacy of old colonial rule and hence does not best fit to the society of Pakistan. Its removal also meant giving the Pakistani market a fair chance to perform as a free market. But no sooner than four years, the government began receiving widespread complaints of excessive profiteering and was forced to act in the year 2005.
What the government did was that unlike its predecessor, (where there was a special Executive Magistrate who had a diverse role of checking and awarding various punishments under various acts like trespassing, public menace, price control etc and had a direct control over the police) the present role of price checking was awarded to the magistrate who has no control, whatsoever, over the police and can only and only check the price. There are no additional costs on the government to maintain the system as the responsibility of price checking has been distributed between the already existing district government machinery.
Therefore, there is no especial budget for price Magisterial system. If the magistrates find discrepancies in the rate lists or the manner of selling or quality of goods the magistrates, in light of the CrPC 3/6 and 3/7, can get the traders imprisoned for up-to three years or fine them up to Rupees one hundred thousand or both. The magistrates only control these prices at the micro level that is the sub-Tehsil level. But the magistrates cannot offer effective price control as they do not have a direct control over the police. Viewpoint of the traders
Almost all the traders, whom we talk to, had the same idea in their minds. According to Khawaja Shahid, the Chairman of the market Committee the traders are of the view that the prices of the goods should be solely determined by the principle of demand and supply with absolutely no interference on part of the government. According to Khawaja Shahid, the government should concentrate as to how to increase the production of the commodities (giving the producers various incentives like subsidies etc) and to ensure an uninterrupted supply of these commodities to the market.
He was of the view that by ensuring a continuous supply of the commodity to the market, the price of the commodity will itself come down. Khawaja Shahid said that it was the failure of the production sector of the country that resulted in a restricted supply of the commodity to the market. This resulted in high prices as demand exceeded the supply resulting in acute shortages. Hen told us that right now, out of the four varieties of the common pulses, two have become extinct and the government has to import them. According to him, if the trend continued in this way, the other two would pretty soon vanish too.
He said the import of these pulses from abroad was not helping the situation as these pulses are imported at a higher rate than what can be obtained from the local producers. Khawaja Shahid also suggested that given the situation of our society, it would be thoroughly unwise to leave the market on its own and therefore suggested that the government should keep a check on the excessive profiteering and hoarding of the commodities. But he made it clear that the government should not at any cost interfare with the prices, rather it should focus on the supply side.
He told us that the DCO under the fact 38/39 invites the stake holders to fix the prices. This control is basically enforceable from retailer to consumer. The traders complaint that the officials threaten them with fines and imprisonment at times to get their ‘unfair’ prices implemented. They complaint that the government did not have the current statistics on the demand of the market resulting in the miss understandings where at times the government insists on lower and ‘week-old-rates’ which result in huge losses to the traders.
Due to these tactics the traders are leaving their business as they cannot operate in losses. The qualities of commodities have decreased as they have to sell their goods on very low profits and at times at no profits at all. Viewpoint of the government officials Mr Syed Munir Ahmed Shah, Special Magistrate 1st Class said that the new capitalist trend required less and less involvement of the government in the matters of trade and that the government is putting in the effort to decrease its role day by day.
He said that the government wanted to monitor the market in light of the complaints received from the general public (consumers) and was only focusing on essential commodities (including pulses). He believed that the present setup has to a great extent positively affected the market. He believes that the magisterial system has not only checked the excessive profiteering and illegal hoardings of the goods (commodities), but has also helped stabilized the market prices of the commodities to a large extent.
The government officials believe that the partial revival of the system was not working effectively for they believe nothing can work in isolation. They said that the other powers that the Executive Magistrate had should also be revived especial the control that they enjoyed over the police. They singled out that it was the lack of the direct control over the police of the magistrate that was resulting in an almost inefficient control of the prices and goods hoardings. Viewpoint of consumer For the consumer it is a loss-loss situation no matter how you look at it.
The markets experiences frequent shortages of essential commodities such as flour and pulses, and most consumers return home empty handed almost every day. One consumer complained that if the government fixes price of one item, the sellers increases the price of some other item in order to maximize profits, whereas he (the consumer) is stranded in between facing uncertainty and confusion. He said that he consumer wanted nothing but stable low prices and proper availability of commodities necessary for life.
Conclusion In conclusion, we have found out that the prices of pulses (and other major consumer goods) are determined by market forces, but are regulated by the government through the mechanism of “price ceiling”. We believe that the price determination should be left to the free forces of demand and supply and that the government should monitor the market conditions on regular basis in order to curb unfair profiteering, hoarding as well as carry out quality checks.
The government should focus more on supply side by giving various incentives to the producers and ensure an uninterrupted supply of the commodities to the market rather than merely controlling the prices, so that we should not loose the remaining two varieties of the pulses. We also believe that the pre 2001 setup should be revoked and police be put under the direct control of the Magistrates so as to increase their effective control over the market.