LS20 - Max & Min Prices Flashcards
Maximum Prices
A price set below the market equilibrium price by the government
Minimum Price
A price set above the market equilibrium price by the government.
Excess Supply
When supply is greater than demand due to price rising above the equilibrium price.
How Does Price Mechanism Remove Excess Supply
The price mechanism signals to producers that the price is too high, the incentive unction ten provides an incentive for producers to lower prices in order to increase total revenue which eliminates excess supply.
Excess Demand
When demand is greater than supply due to price falling below the equilibrium.
How Does Price Mechanism Remove Excess Demand
The price mechanism signals to producers that the price is too lower, the incentive function provides an incentive for producers to increase prices in order to increase total revenue, which eliminates excess demand.
Guaranteed Minimum Pricing Scheme
A scheme in which excess supply from a minimum price is purchased buy the government at the minimum price. The purpose is to protect producer incomes.
Free Market Equlibrium
Where MPB = MPC
Social Optimum Equilbirum
MSB = MSC
Shaded Part Of Production Externality Diagram
Welfare Loss/Welfare Gain
Welfare Loss
The level of prosperity and quality of living standards in an economy decreasing.
Advantages Of Maximum Price
Prices are lowered for consumers, which is helpful in markets dominated by monopolies who usually control the market price
Advantages Of Minimum Price
In agricultural market, food stability is increased.
Can reduce consumption of demerit goods e.g. alcohol.
Producer incomes are protected in agricultural markets.
Disadvantages Of Maximum Price
Difficult to set price at the right level, due to information gaps
Opportunity cost from costs of enforcement
Black market may emerge
Disadvantages Of Minimum price
Higher prices for consumers, which decreases consumer surplus.
Excess supply represents a waste of resources that could’ve been used more productively elsewhere.
Excess supply created –> some producers unable to sell goods –> potential for losses.
