1.4.1 Maximum And Minimum Price Flashcards
What is maximum price?
Where is it usually set?
It’s a legally imposed price ceiling in a market that supplies cannot exceed
It’s usually set below the equilibrium market price
Why does the government set a maximum price?
To improve affordability of necessity goods and services to consumers, especially those on lower income
How do consumers benefit from maximum price?
Add counter point
They benefit from maximum price as they can buy goods and services that are necessities for cheaper such as energy or food
However, in the long-term they may face the cost of higher prices returning as supplies may pull out of the market
Why don’t producers benefit from a maximum price?
Add counter point
They don’t benefit as their revenues decrease their profit margins decrease and their producer surplus also decreases
However, they could be able to recoup their profits in certain periods in a year
Also depends on the amount set of the maximum price
How might a black market be formed when there’s a maximum price?
If there is excess demand consumers may pay a higher unofficial price to get that good or service which causes a black market
What are the benefits of maximum price?
Reduces excessive profits of firms trying to exploit those in greatest needs
Makes essential goods and services affordable, especially those on lower incomes
It can help increase a persons disposable income
What are the disadvantages of maximum price?
Lack of investment and supply meaning in the long run prices rise and consumers better the cost
Farms made cheap out on quality for product
For housing landlords may cut maintenance spending
What are some evaluative points for maximum price?
The short run a long run effects on consumers
Extent of price cap for firms
Inertia for consumers
And the PES of supply
And if a firm is able to recoup their profits
