Governments across the world rely on various strategies and policies to control or dictate the stability of the microenvironment. The issuance of guidelines is a practice that tends to influence people’s purchasing decisions and the overall percentage of inputs.
The government can decide to increase valid added tax (VAT) for specific products that could fetch additional revenues or discourage their use. The significance of the government’s role is presented by its substantial influence on the level of demand for most of the intended products.
The cause of governmental interference in the economy is that the government manages the state’s financial policy and determines the sources of the state’s income. The government creates economic policies, such as individual income taxes and corporate taxes, which influence the supply and demand rates.
In some cases, government policy could be implemented in the form of a subsidy. When such a strategy is put in place, the state will offset most of the challenges and failures experienced in the market. These indirect payments could help push the demand for a number of products upwards. In most cases, governments rely on such policies to ensure that the economy becomes more efficient.
The use of interest rates could become a powerful policy strategy for reshaping the nature of demand and supply in the market. According to Mankiw, an increase in interest rates will encourage members of the public to achieve increased real balances. This trend will trigger the overall level of aggregate demand, thereby making it easier for more people to spend money.
In different countries, governments can rely on the money supply to dictate the existing macroeconomic forces. Opuni argues that any decrease in money supply will affect demand for most of the services and goods in the market. Through policy mechanisms, the state can declare that individuals should receive specific minimum wages in different professions. It can also use powerful policy mechanisms to increase employment opportunities.
Such mechanisms will affect the levels of demand and supply since more people would be able to get competitive income. In some advanced scenarios, governments might ban specific products or services if they are deemed dangerous or a threat to national security. Such an occurrence will reduce the overall level of demand.
These analyses indicate that the adoption and use of fiscal policy allow the government to increase or reduce both taxation and spending. These factors will have significant implications on income and customer spending. The emerging policies will impact the overall level of monetary supply, thereby dictating the recorded inflation rates in the market. These forces will, therefore, have significant implications for both demand and supply.
Several concepts influence the supply and demand rates:
- The supply and demand rates are influenced by several market forces, including price fluctuations, competitiveness, and society’s trends;
- The concept of elasticity explains how a product’s price changes influence the demand;
- Higher elasticity means that reduced price causes an increase in demand;
- Low elasticity means that reduced price causes an insignificant increase in demand;
- Governmental regulation policies positively influence supply and demand by creating favorable conditions for business development.