During the late 1980s and early 1990s, economic reforms initiated by Soviet President Mikhail Gorbachev began to raise consumer incomes; but the Soviet government continued to impose price ceilings on basic goods like food, clothing, household goods. As a result, there were severe shortages of many goods and long lines at all kinds of stores became common. Then, in January 1992, the new Russian government, under President Boris Yeltsin, removed retail price controls on most goods. Within a month, prices more than doubled on average and lines disappeared.
Analyze these events using the supply and demand model.
First draw a supply and demand diagram for some common good, i.e., butter, showing the market in equilibrium before the beginning of the Gorbaachev reforms. Next, use shifts of the appropriate curves to show why the combination of rising incomes plus price ceilings produced shortages and lines. Finally, show what happened when price controls were removed in 1992.