T1: LS20 - Max And Min Prices

Question 1

Maximum price meaning and how to draw

Answer 1

Maximum price: a price set below the market equilibrium by the government.
- draw horizontally below the equilibrium point to replicate excess demand
E.g. Maximum on CEO pay

Question 2

Minimum price definition and how to draw

Answer 2

Minimum price: a price set above the market equilibrium price set by the government.
- set above the equilibrium causing excess supply
E.g. minimum price on agriculture to protect producers

Question 3

Benefits of minimum prices

Answer 3

M - Monopoly power/ money for wages
E - Externalities: correct/ finances costs
D - Demerit goods: deters use
S: Seasonal industries (protects them)
S: sustainable production standards

Question 4

Drawbacks of Minimum prices

Answer 4

R - regressive: incidences impacting low income families most
I - Inelastic demand-> not reduce demerit
B - black markets from high prices
U - Utility reduced
S - Excess supply causes waste
S - Set at the right level??

Question 5

Benefits of maximum price

Answer 5

M - Monopoly exploitation: reduces by limiting price
A - Affordable: keeps G&S cheap for consumers
I - Inflation: controls demand-pull inflation
D - Increases demand for firms products

Question 6

Drawbacks of maximum prices

Answer 6

B - Black market from excess demand
U - Utilising reosurces: inefficient due to lack of need
R - revenue for Gov/ firms from tax
P - Profit not maximised: less motive for firms
P - lower producer surplus
S - Supply shortage. Not all can get due to rivalrous nature.