Price Flexibility
In every economy, the prices of products and services are significant, as it determines the demand and supply of goods and services. This demand and supply will determine the revenues that the government gets from taxes levied on income and the VAT tax on the products. In the current world free market trade, price flexibility is very significant so that based on people purchasing power and willingness to buy, prices can always be adjusted. The government is among the sectors in the economy, which mostly controls the prices for some of the products, such as gasoline and services. Prices affect demand and supply in that when prices are lowered; there will be an increased demand, safe for Giffen goods. A decrease in rates also reduces the number of products supplied. These effects are what the government uses to control the economy, for various reasons, with the main one being to maintain stability.
The government controls the prices of products and services through price controls. There are several reasons to which the government does this. The government uses price flexibility to encourage or discourage the consumption of some products. For example, the government may increase the prices of alcohol to reduce the rates of consumption and reduce the amount of food to increase consumption. Price flexibility is also used by the government to bring stability to prices since trade is operating in a free market. This stability ensures that producers do not charge too much for consumers to afford. It also controls monopolies through price control by setting minimum and maximum prices. Products like gasoline are significant as it influences the cost of all other goods and therefore would be mostly used to control the economy.