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1. The Government’s
Role in Price
Stability
Done by: Aashi, Deeksha,
Kavin of 9D
IGCSE Economics Project Based Assessment Jan 2022

2. Learning objectives
• What is price stability? What is it determined by?
• What does the government do to achieve this aim and why
• Price stability in India
• What other macroeconomic aims prevent the govt. from
achieving price stability and why

3. What is Price
Stability?
• Price stability refers to a state in the
economy when price level is not
changing significantly over time
• Although the prices of some products
may fall while others rise, the amount
individuals generally pay for the products
they are buying is similar and stable

4. Why is price stability important?
• Price levels determine inflation and deflation
• If general price is stable  consumers are able to determine the relative price in
the event of a price change and the demand decreases/increases accordingly
• If general price is not stable  consumers cannot determine the relative price,
inflation increases
• Stability allows firms and consumers to realize the changes in the prices and
make informed decisions.

5. Benefits of Price Stability
• Improves price transparency: consumers can recognize relative price changes
without being confused by overall price changes, means informed decision-
making when they consume and invest.
• Avoids unfair redistribution of wealth: When unexpected inflation occurs, wealth
is redistributed randomly, rather than based on merit or need
• Lowers risk premium: A risk premium is the lowest return on investment a
consumer needs in order to hold a risky asset. If risk premia are high, it means
consumers are unwilling to make risky investments, and economic activity
slows.

6. Factors that
affect price
and stability
Production cost  total costs of making the
product
Demand  depends on the elasticity of the
product
Competition in the market  high competition
means low price and vice versa
Legal regulations  govt fixes a minimum and
maximum prices, taxes firms
Objectives  profit maximization, surviving in
the market, achieving the best quality
Marketing methods  distribution, packaging,
advertising, etc.

7. The role played by the
government
• Governments provide the legal and social
framework for the market and help maintain
competition
• They provide public goods and services and
redistribute income to stabilize the price
• Controls price levels, using the monetary
policy, a control of the quantity of money
available in an economy and the channels by
which new money is supplied
• Government raises interest rates in firms
when the prices are increased on a specific
product.

8. Importance of government intervention
• Price stability ensures greater economic certainty and prevents the country's
products from losing international competitiveness
• - To protect the interests of the susceptible sections of the customers given the
income distribution.
- To enable investment in priority industries which are essential for laying the
foundation for speedy economic growth of the country.
- To avoid monopolistic exploitation by a few firms belonging to a single
industry.

9. Fiscal and
Monetary
Policies
• Through the fiscal policy, the government
of a country controls the flow of tax
revenues and public expenditure to
navigate the economy
• It affects demand, the distribution of
wealth, and the economy’s capacity to
produce goods and services.
• The goal of monetary policies is to help the
economy reach or maintain monetary
equilibrium
• Meaning, prices will be stable when people
have no more money or no less money
than they need to make the purchases
they want to make.

10. Our country’s management of price
India has a price monitoring division to monitor and manage the price
fluctuations of essential commodities
22 goods and services have been selected as essential commodities. They
include: Rice, Wheat, Atta, Tea, Milk, Tomato, Salt, etc.
In the case the prices increases or decreases, the PMD intervenes and
implements market schemes
Retail of these commodities from 167 centers are received daily from the
State Civil Supplies through a Mobile App developed by the Department

11. Price Stabilization Fund in India
• The Price Stabilization Fund (PSF) was set up with an initial corpus of ₹500 crore to tackle inflation
trends of agricultural commodities
• These commodities are procured and stored for regulated release to help moderate the prices.
• This scheme has three main aims:
- promote direct purchase from farmers /farmers’ association
- maintain a strategic buffer stock that would discourage hoarding
- protect consumers by supplying such commodities at reasonable prices through controlled
release of stock.

12. Macroeconomic aims that
oppose price stability
• The main macroeconomic aim that opposes
price stability is full employment
• When monetary policy is directed to reduce
inflation and bring price stability, there tends
to be an increase in the rate of
unemployment
• Increased income of labourers leads to the
consumers having a higher purchasing
power, this increases demand
• To keep up with the demand, firms will have
to produce more and in turn increase prices
to cover their costs
• Thus, the price may no longer be stable