effects of the imposition of ‘price controls’ (3)

Question 1

what are the microeconomic effects of imposing price ceilings on an economy

Answer 1

• define price ceiling -> a legal maximum price below the market equilibrium price (e.g., rent controls).
  1. **leads to excess demand (shortages) ** -> e.g. rent controls; landlords receive lower rental income than in a free market -> lower potential returns -> less incentive to supply rental properties -> contraction in quantity supplied -> however more people want to rent properties at lower prices -> extension in quantity demanded but less properties are available -> Qd>Qs -> market shortage -> misallocation of resources as landlords may sell their properties -> market failure -> producers may switch to producing where price controls are not monitored e.g. black market

Question 2

evaluate the microeconomic effects of imposing price ceilings on an economy

Answer 2

• rent controls increase affordability for low-income households esp in areas w/ high living costs e.g. London
  -SR -> renters benefit from lower costs -> higher purchasing power -> more disposable income to spend elsewhere in the economy

Question 3

what are the microeconomic effects of imposing price floors on an economy

Answer 3

• define price floor -> a legal minimum price set above the equilibrium price (e.g. National Minimum Wage)
  1. price floors lead to surpluses and inefficiency -> e.g. NMW -> price set above equilibrium -> employees receive a higher wage than the market wage rate -> more workers are willing and able to supply labour (extension in quantity supplied) -> less employers are willing and able to hire workers due to higher costs (contraction in quantity demanded) -> Qs>Qd -> surplus of labour -> waste of scarce resources -> market failure -> increased unemployment

Question 4

evaluate the microeconomic effects of imposing price floors on an economy

Answer 4

• NMW reduces wage disparities -> reduces relative poverty -> increases worker morale -> more productivity
• can protect agricultural industries -> ensures food security -> reduces dependence on imported goods
• supply side policies e.g. training schemes can make higher wages more sustinable through improving worker productivity

Question 5

what are the macroeconomic effects of imposing price ceilings on an economy

Answer 5

• gov. fiscal burden + incr national debt -> e.g. Energy Price Guarantee (2022-23) -> gov. provided subsidies to compensate energy suppliers for revenue shortfalls -> higher public spending -> incr budget deficit (expenditure > tax revenue) -> gov. borrowing incr -> worsened national debt if not offset by taxation -> higher interest payments -> diverts funds from public expenditure e.g. infrastructure, education -> gov. may raise taxes to fund subsidies -> reduces business investment and eco. growth

Question 6

evaluate the macroeconomic effects of imposing price ceilings on an economy

Answer 6

• short term necessity during crises -> protects vulnerable households from extreme economic shocks
• ensures consumers + businesses can plan spending without fear of extreme price volatility -> increased consumer + business confidence -> consumption and investment may incr in the long term

Question 7

what are the macroeconomic effects of imposing price floors on an economy

Answer 7

• cost-push inflation -> e.g. a rise in NMW -> i.e. is incr to £10/hour (2024) -> higher labour costs for producers -> higher unit labour costs (cost per worker per unit of output) -> increased production costs (SRAS inward = price level UP) -> high costs passed to consumers = high prices -> ‘wage-price spiral’ -> employees have lower real incomes as living costs rise -> negotiate higher wages -> higher costs for producers -> further price rise -> may lead to stagflation if rising inflation coincides with stagnant eco. growth

Question 8

evaluate the macroeconomic effects of imposing price floors on an economy

Answer 8

• growth in real wages -> higher incentive to work -> higher labour productivity + efficiency -> long-run benefits
• higher wages would incr household disposable income -> greater consumption -> AD stimulus -> growth
  Real wage growth can increase productivity → Higher