Distortion Of Price Mech Flashcards
In Big Bang theory, how an earth was sheldon Leonard and penny able to afford those apartments when they were younger and first started working ? What is ur known as
This is because the government set maximum prices on flats and houses. This is known as rent control
Where would the gov set this maximum price ?
They would set it below the equilibrium price to stop it going back up to the equilibrium price
However, what would lower prices do to suppliers and consumers ? And why
It would cause excess demand as there is a shortage of goods. This is because lower prices would no longer be worth for producers and it would lower incentives for suppliers to supply.
What did the maximum price do ?
It distorts the price mechanism as it reduces producers incentives. Worsens allocation of resources
On the other hand, why did the EU government set a common agricultural policy ?
They was worried out of food running and set a minimum price
Why did the EU want to keep prices high ?
This was done to incentivise farmers to supply more and make sure Europe had a secure food supply
However, what did this do for consumers ?
This would cause a contraction in quantity demanded for food as prices are too high for consumers
What did this incentivise suppliers to do ?
It would incentivise producers to overproduce and cause an excess supply
What costs would come because of this overproduction from the suppliers ?
The suppliers will have to dispose their excess supply and they will overuse their factors of production damaging sustainable growth. Creates negative externalities
What was the minimum price mean to do and what did it actually do ?
It distorted the price mech as there was an excess supply and a disequilibrium.
What was the minimum price mean to do and what did it actually do ?
It distorted the price mech as there was an excess supply and a disequilibrium. Suppliers had to get rid of stock lowering profits gained and maybe causing external costs in the future.
Why is the minimum price an example of government failure ?
Because it lead to a worser allocation of resources as consumers cannot afford high price and suppliers stock is ruined. Price mech is distorted
