MICRO - LS20 - Max & Min Prices Flashcards

1
Q

Maximum price

A

A price set below the market equilibrium price by the government

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2
Q

Minimum price

A

A price set above the market equilibrium price by the government

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3
Q

Types of monopoly

A

Legal monopoly - own 25% or more of the market share
Pure monopoly- sole supplier in industry e.g. water

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4
Q

Why are monopolies important

A
  • they ‘own the market’ and control price - can make it too high - cause consumer welfare loss
  • influence productivity - could reduce supply so that price will increase
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5
Q

Minimum price examples

A
  • cleaner’s wages
  • cigarettes
  • farmers incomes
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6
Q

Maximum price examples

A
  • CEO pay
  • rent
  • water
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7
Q

Why high prices in markets can be considered as a market failure

A
  • Economic theory states that in markets where firms have a high degree of market power prices will be higher and output lower than under competitive market conditions
    -This results in a deadweight welfare loss
  • Therefore, monopoly power can be thought of as a form of market failure as efficiency is lowered
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8
Q

what happens to consumer/producer surplus if minimum price introduced

A

consumer - decrease
producer - increase

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9
Q

what happens to consumer/producer surplus if maximum price introduced

A

consumer - increase
producer - decrease

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10
Q

What does a minimum price create in a market

A

excess supply

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11
Q

what does a maximum price create in a market

A

excess demand

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12
Q

guaranteed minimum pricing scheme

A
  • a scheme in which excess supply from a minimum price is purchased by the government at the minimum price
  • purpose is to protect producers income
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13
Q

agricultural products

A
  • demand & supply are both inelastic as prices tend to be volatile
  • means income earned by farmers is volatile - may leave market due to losses putting food supply at risk
  • to prevent this minimum price is introduced as excess supply would be created, some producers may make a loss
  • one way to stop this is to buy excess supply so a producer wouldn’t lose out
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