Maximum Prices and Minimum Prices Flashcards
What’s maximum price?
A maximum price is a price set below the equilibrium by a government – it is the highest price that can be set by a producer.
Why are maximum prices set ?
To ensure that the poor can afford basic necessities.
It prevents exploitation of consumers and encourage low income earners to afford essentials.
What are the conditions of a maximum price?
It usually creates a shortage in the market.
It is set below the market price.
It pushes producers to sell at a black market price.
What does the maximum price diagram look like?
There’s a price set below the equilibrium. Which creates excess demand.
What are the pros of maximum prices?
The price of essential products will make it more affordable for people.
In the housing market it can prevent rent from becoming expensive.
Controls inflation
What are the cons of maximum prices?
It creates excess demand in the market.
leads to bribery or corruption.
black markets may emerge
economic inefficiency due to the loss of welfare.
What’s the deadweight loss?
It’s a cost to society created by market inefficiency. This occurs when supply and demand are out of equilibrium.
What are the strats used for effective maximum price controlling?
- Rationing - Use to buy goods or issuing ration cards for the public to buy only a limited amount of a good.
- Importing - Goods can be imported from other countries as a measure to increase the availability of the product in the market.
What are minimum prices?
A minimum price is the lowest price that can legally be set. It is set above the equilibrium. It will create a surplus in the market. To prevent it the surplus has to be bought by the government.
Ex. Used for agricultural products.
What are the pros of minimum prices?
The producers’ incomes are stabilized
Supply of agricultural products is guaranteed.
It is similar to national minimum wage meant to protect employees.
What are the cons of minimum prices?
The price of goods increased which may result in hardship for those on lower incomes.
Creates an excess supply
There are increased storage and security costs.
Government spending involves an opportunity cost.
What are the strats used for effective minimum price controlling?
- Motivate consumers to buy higher amounts of goods through advertising.
- Seek export opportunities in the foreign market for the excess supply.
- Make more by products.
What are the main differences between max and minimum price?
