Maximum Prices

Question 1

What is a maximum price

Answer 1

• A maximum price is a legal maximum price imposed in a market below the free market equilibrium price
• producers cannot exceed this maximum price

Question 2

What is the aim when imposing a maximum price

Answer 2

Make certain goods and services more affordable widely available for the general population

Question 3

What is needed for a maximum price to be effective

Answer 3

Maximum price needs to be below the free market equilibrium price to be effective at making goods more affordable

Question 4

Give examples of maximum prices in practice

Answer 4

• energy caps
• rent controls
• caps on ceo bonuses

Question 5

Draw a maximum price diagram (check have u shown)

Answer 5

• contraction in supply
• extension in demand
• excess demand
• qs and qd
• deadweight welfare loss

Question 6

What effect does imposing a maximum price have on demand and supply

Answer 6

A maximum price causes a extension in demand and a contraction at q3 in supply at q2
- this means demand outweighs supply
Which leads to excess demand

Question 7

What effect has a maximum price got on producer revenue

Answer 7

Decreases producer revenues

Question 8

What are the benefits of a maximum price On a consumer

Answer 8

• consumers which can access the lower supply of q2 experience lower prices, an increased consumer surplus and greater consumer welfare overall

Question 9

Evaluate the consumer benefits point

Answer 9

• however there is a large amount of excess demand who don’t actually get to access the products which leads to a decrease in consumer welfare as they may have to resort to things such as a black market and long queues

Question 10

What effect does maximum prices have on producers

Answer 10

• lowever reveneus and supply
• move to other industries rather than renting

Question 11

What effect does maximum prices have in the government

Answer 11

• helps increase equity and equality
  However can lead to black amrkwts occurring due to excess demand

Question 12

What effect does lower producer revenue have

Answer 12

• less investment and maintenance so the quality of foods or housing is lower
• may choose to leave the market which leads to a shortage in houses and food supply
• for just rent they may demolish rent hosues and build to buy houses causing house prices to rise and decreasing living standards as less people will be able to buy a house and rent a hosue