LS20 - Max and Min Prices Flashcards
What makes a firm qualify as a legal monopoly?
25% of the market shares are earned by the firm
What happens when a firm owns over 50% of the market shares?
It becomes a market leader/dominant player. They then dominate:
Price (sales)
Other firms
Quantity Produced
What happens when a maximum price is set?
A price set below the market equilibrium price by the government causing excess demand
What happens when a minimum price is set?
A price set above the market equilibrium price by the government causing excess supply
When is maximum price used?
Electric and Fuel Bills, Rent
These are put in for necessities to prevent prices from rising too high
When is minimum price used?
Farmers, Fair Trade, Wage
Put in to guarantee income
Alcohol, Cigarettes
Put in to limit externalities
What does the government do with the excess stock generated from a minimum price?
The excess stock is bought up by the government and sold to other markets, domestically or internationally
What are the advantages of maximum prices?
Prices are lowered for consumers
What are the advantages for minimum prices?
Food stability
Reduce consumption of demerit goods
Producer incomes are protected
How do minimum prices guarantee food stability?
The minimum price prevents farmers from leaving a market by guaranteeing them an income, so supply is constant
How do minimum prices reduce the consumption of demerit goods?
Minimum prices make demerit goods more expensive, reducing demand and so limiting externalities
What are the disadvantages of maximum prices?
Shortages created
Black Markets
Cost of Enforcement
Information Gaps
Rental Markets
How do maximum prices cause shortages?
Goods and services may be distributed on first-come, first-served basis
This is often deemed unfair
How do maximum prices result in black markets?
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
What is the effect of information gaps on maximum prices?
Information gaps leads to prices being set too high or too low which will harm producers or consumers
Why are maximum prices bad for the rental market?
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
What are the disadvantages of minimum prices?
Excess Supply
Low Consumer Benefit
Wastage
What is the effect of excess supply through minimum prices?
Some producers are unable to sell goods which results in potential for losses through wastage of resources
Why is there lower consumer benefit?
High prices on goods for consumers. This lowers consumer surplus
What is a guaranteed minimum pricing scheme?
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
What are the advantages of guaranteed minimum pricing scheme?
Producer’s income increase or stabilise
Greater security for food supply
Surplus can be stockpiled or as aid
What are the disadvantages of guaranteed minimum pricing scheme?
Foreign Competition
Opportunity Cost
Information Gaps make it difficult to set price
Costs
How do guaranteed minimum pricing schemes create foreign competition?
Surpluses may be sold overseas at lower prices. This could damage farmers in developing countries that are likely to struggle to compete
What are the opportunity costs from guaranteed minimum pricing schemes?
Opportunity cost of government finances. It may have to raise taxes or cut government spending in other areas
