22-Maximum Prices Flashcards

1
Q

What is a maximum price and what does it do?

A

A maximum price controls or price ceilings have been used by governments in a variety of contexts, e.g rented accommodation, for wages of rugby league players and for items of food.

It makes it illegal for firms to charge more than a certain price for a given quantity of a product

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2
Q

How is price maximisation found on a supply and demand diagram?

A
  • A straight line below equilibrium.

- There will be a shortage

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3
Q

What could the maximum price shortage lead to?

A

A black market- in which those in supply of the products sell it illegally at a price significantly higher than the maximum price.

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4
Q

Advantages if maximum prices?

A
  • They enable consumers on low incomes to be able to afford to buy a product
  • They help prevent an increase in the country’s rate of inflation
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5
Q

Disadvantages of maximum prices?

A
  • There is a danger that shortages mean that some consumers are unable to find supplies of the product
  • Producers may exit the market in order to use their resources to produces goods that are profitable
  • If the government subsidies producers to encourage them to maintain output, then there will be a significant cost to the tax payer
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