Maximum and minimum prices Flashcards
What is a maximum price?
A legally imposed price ceiling in a market that suppliers cannot exceed
What has to happen in order for the maximum price to be effective?
It has to be set below the market equilibrium price
Give three examples of a maximum price in action
.Rent controls to improve affordability
.Energy price caps to control fuel bills
.Caps on mobile roaming charges in the EU
.Caps on CEO’s wages
What do maximum prices often lead to?
Secondary (Unofficial markets)
What happens to the quantity to supplied if a maximum price is imposed?
Quantity supplied decreases
Why do secondary markets occur due to a maximum price being imposed?
A scarcity of supply means that some customers are willing and able to pay over the regulated price
What is a minimum price?
A minimum price is a legally imposed price law in which normal market price cannot fall
In order for a minimum price to be effective where does it need to be set?
Needs to be set above the normal equilibrium price
Give two benefits of maximum prices
.Leads to lower prices for consumers
.Maximum prices can increase fairness as it allows more people to purchase the good or service
.Max prices can be used to stop preventing monopolies exploiting customers and suppliers with high prices.
.Usually reserved for important goods such as food and rent
Give two drawbacks of maximum price
.Leads to a shortage of the good
.Since demand is higher than supply some people who want to buy goods aren’t able to
.Can lead to black markets originating
.Governments may need to introduce a rationing scheme to allocate the goods
Give two benefits of minimum price
.Designed to give producers more income
.Protects businesses and industry (In theory)
.Protects consumers from buying harmful/ de merit goods
Give two drawbacks of minimum prices
.Higher prices for consumers
.Market is in disequilibrium
.Higher tariffs necessary on imports to keep prices high
