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
2
Q
How is price maximisation found on a supply and demand diagram?
A
- A straight line below equilibrium.
- There will be a shortage
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.
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
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