Effects of hoarding on market prices - Essay Example

As a basic economic rule, whenever a supply of a particular item is less than the quantity demanded, the former puts inflationary pressure on the price of the goods and prices increase, if the quantity supplied could not match the quantity demanded. This can be shown through pictorial representation: The above diagram shows how hoarding affects the equilibrium condition in the market and increases the market prices. If we explain the above diagram, we can easily see that the Indian food is at a point e, where demand and supply equal at market price p1 and at quantity Q.

However, as soon as the hoarding activity, this results in supply curve being shift to s1 from initial supply curve of S. As a result of this a new equilibrium is formed at the point e1. At this point the quantity is below the initial quantity of Q at Q1. (Sloman, 2004) Similarly, due to this a shortage has been created and people with more money are ruling the market by the virtue of being able to pay higher prices. As a result the market price of food items increases high and now the food stuff is available at a higher market price of p1.

As a result this hoarding decreases the supply and increases the market prices. . Now, let's assume that at the time when hoarding activities are going and due to poor crop the going market prices are set at the price p. However, due to effective government action against hoarders and release of buffer stock into the market, the supply of food items in the market will now increase to a new supply position of Se. We can clearly see that Se is rightward of the supply curve at the time hoarding that is Sh.

This shows that the supply in the market has increased. This increase in supply means that there is more food stuff now available in the market at quantity Qe. This will reduce the market prices from previous prices which at the time of hoarding were at ph to pe. This analysis clearly shows how effective action by the government against hoarders can reduce the market prices and bring inflation of food items under control. Thus, we can assume that the article is suggesting the right ploy by which the Government of India can bring prices under control.

(Clermont, 2009)Another issue that has been raised in the article is how India is using measures to reduce their trade deficit by introducing export benefits for businesses in India which will increase their competitiveness in the international market. This means that government will give them tax holidays. As a result of which cost of production in India will reduce which will lower the prices of "Made In India" products. As a result of which imported goods for Indians will become expensive and hence Indians will prefer domestic production and hence reduce imported goods.

This will means that India will have a lower cash outflow and hence this will improve the foreign trade situation in India.