LS20 - Max and Min Prices Flashcards

1
Q

What makes a firm qualify as a legal monopoly?

A

25% of the market shares are earned by the firm

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2
Q

What happens when a firm owns over 50% of the market shares?

A

It becomes a market leader/dominant player. They then dominate:
Price (sales)
Other firms
Quantity Produced

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2
Q

What happens when a maximum price is set?

A

A price set below the market equilibrium price by the government causing excess demand

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3
Q

What happens when a minimum price is set?

A

A price set above the market equilibrium price by the government causing excess supply

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4
Q

When is maximum price used?

A

Electric and Fuel Bills, Rent
These are put in for necessities to prevent prices from rising too high

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5
Q

When is minimum price used?

A

Farmers, Fair Trade, Wage
Put in to guarantee income
Alcohol, Cigarettes
Put in to limit externalities

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6
Q

What does the government do with the excess stock generated from a minimum price?

A

The excess stock is bought up by the government and sold to other markets, domestically or internationally

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7
Q

What are the advantages of maximum prices?

A

Prices are lowered for consumers

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8
Q

What are the advantages for minimum prices?

A

Food stability
Reduce consumption of demerit goods
Producer incomes are protected

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9
Q

How do minimum prices guarantee food stability?

A

The minimum price prevents farmers from leaving a market by guaranteeing them an income, so supply is constant

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10
Q

How do minimum prices reduce the consumption of demerit goods?

A

Minimum prices make demerit goods more expensive, reducing demand and so limiting externalities

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11
Q

What are the disadvantages of maximum prices?

A

Shortages created
Black Markets
Cost of Enforcement
Information Gaps
Rental Markets

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12
Q

How do maximum prices cause shortages?

A

Goods and services may be distributed on first-come, first-served basis
This is often deemed unfair

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13
Q

How do maximum prices result in black markets?

A

Producers who want to profit maximise sell on the black market as there is no maximum price and so can sell for greater prices, increasing revenue

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14
Q

What is the effect of information gaps on maximum prices?

A

Information gaps leads to prices being set too high or too low which will harm producers or consumers

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15
Q

Why are maximum prices bad for the rental market?

A

Producer surplus falls and so landlords have less money to invest and maintain their property. There is a long-term decline in the quality of the housing stock

16
Q

What are the disadvantages of minimum prices?

A

Excess Supply
Low Consumer Benefit
Wastage

17
Q

What is the effect of excess supply through minimum prices?

A

Some producers are unable to sell goods which results in potential for losses through wastage of resources

18
Q

Why is there lower consumer benefit?

A

High prices on goods for consumers. This lowers consumer surplus

19
Q

What is a guaranteed minimum pricing scheme?

A

A guaranteed minimum pricing scheme is where the surplus output created is purchased by a government agency at the minimum price. The aim of the scheme is to protect producer incomes

20
Q

What are the advantages of guaranteed minimum pricing scheme?

A

Producer’s income increase or stabilise
Greater security for food supply
Surplus can be stockpiled or as aid

21
Q

What are the disadvantages of guaranteed minimum pricing scheme?

A

Foreign Competition
Opportunity Cost
Information Gaps make it difficult to set price
Costs

22
Q

How do guaranteed minimum pricing schemes create foreign competition?

A

Surpluses may be sold overseas at lower prices. This could damage farmers in developing countries that are likely to struggle to compete

23
Q

What are the opportunity costs from guaranteed minimum pricing schemes?

A

Opportunity cost of government finances. It may have to raise taxes or cut government spending in other areas

24
Q

What are the financial costs of a guaranteed minimum pricing scheme?

A

There are storage and security costs for the stockpiles of excess supply