MICRO - LS20 - Max & Min Prices

Question 1

Maximum price

Answer 1

A price set below the market equilibrium price by the government

Question 2

Minimum price

Answer 2

A price set above the market equilibrium price by the government

Question 3

Types of monopoly

Answer 3

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

Question 4

Why are monopolies important

Answer 4

• 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

Question 5

Minimum price examples

Answer 5

• cleaner’s wages
• cigarettes
• farmers incomes

Question 6

Maximum price examples

Answer 6

• CEO pay
• rent
• water

Question 7

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

Answer 7

• 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

Question 8

what happens to consumer/producer surplus if minimum price introduced

Answer 8

consumer - decrease
producer - increase

Question 9

what happens to consumer/producer surplus if maximum price introduced

Answer 9

consumer - increase
producer - decrease

Question 10

What does a minimum price create in a market

Answer 10

excess supply

Question 11

what does a maximum price create in a market

Answer 11

excess demand

Question 12

guaranteed minimum pricing scheme

Answer 12

• 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

Question 13

agricultural products

Answer 13

• 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