MICRO - LS20 - Max & Min Prices Flashcards
Maximum price
A price set below the market equilibrium price by the government
Minimum price
A price set above the market equilibrium price by the government
Types of monopoly
Legal monopoly - own 25% or more of the market share
Pure monopoly- sole supplier in industry e.g. water
Why are monopolies important
- 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
Minimum price examples
- cleaner’s wages
- cigarettes
- farmers incomes
Maximum price examples
- CEO pay
- rent
- water
Why high prices in markets can be considered as a market failure
- 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
what happens to consumer/producer surplus if minimum price introduced
consumer - decrease
producer - increase
what happens to consumer/producer surplus if maximum price introduced
consumer - increase
producer - decrease
What does a minimum price create in a market
excess supply
what does a maximum price create in a market
excess demand
guaranteed minimum pricing scheme
- 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
agricultural products
- 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