2.11 Government Intervention (MIN AND MAX PRICE)

Question 1

what do the government adjust

Answer 1

adjust the market equilibrium to where they think it should be, usually because they feel that the market is failing to some degree.

Question 2

what is minimum price also known as

Answer 2

price floors

usually places above equilibrium

Question 3

define minimum prices

Answer 3

Minimum prices are set above the equilibrium price to ensure a certain price level for producers, often used to protect them from low prices or to encourage production of certain goods.

Question 4

give examples of minimum pricing

Answer 4

Minimum wage laws set a minimum price for labor, ensuring workers receive a certain wage

Question 5

what happens to the graph with minimum prices

Answer 5

neither supply or demand move

Question 6

what are the pros of minimum pricing

Answer 6

• price is higher to consumers therefore demand decreases, therefore consumption
• simple, efficient way to change the price.
• quality may be improved
• higher prices can lead to better wages
• stabilizes markets
• Can protect producers from price volatility and ensure a certain income

Question 7

what are the cons of minimum pricing

Answer 7

• the increase in price incentivises suppliers into the market which may create a misallocation of resources.
• this may encourage shadow illegal markets to enter the supply chain
• price controls need legislation and/or regulation to enforce and monitor
• inelastic products need a
  huge/substantial price change.
• the scale of impact on this policy is dependant on the PED and PES
• can lead to excess supply, as producers may be willing to supply more at the higher price, but consumers may not demand as much.

Question 8

when you draw the price floors or ceilings what do you do to the line

Answer 8

solid line that extends all the way out

Question 9

minimum pricing- who gains the additional revenue

Answer 9

supplier gains the additional revenue as producer surplus, rather than tax revenue going to government

Question 10

what do maximum prices require

Answer 10

subsidies

Subsidies help ensure the price ceiling doesn’t lead to a decline in supply by lowering production costs for businesses, encouraging them to supply more at the lower price.

Question 11

what are maximum prices also known as

Answer 11

price ceilings

Question 12

define maximum prices

Answer 12

Maximum prices are set below the equilibrium price to keep prices affordable for consumers, often used for essential goods or services.

Question 13

give an example of maximum prices

Answer 13

Rent control laws set a maximum price for rental properties.

Question 14

pros of maximum pricing

Answer 14

• it is effective in increasing demand
• it is effective for social welfare gains e.g health

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Question 15

cons of maximum pricing

Answer 15

• Can lead to excess demand, as consumers may want to buy more at the lower price, but producers may not be willing to supply as much.
• May cause shortages, as producers may reduce output or leave the market if they cannot cover their costs at the lower price. THIS IS WHEN SUBSIDIES MAY BE USED. THIS INCREASES COSTS FOR GOVT.
• Can lead to black markets or alternative ways of obtaining the good or service at higher prices, potentially exploiting consumers.
• govt will have to provide subsidies to suppliers to ensure the excess demand is met.
• depends on PED and PES for effectiveness

Question 16

what happens to graph with maximum pricing

Answer 16

supply shifts outwards to the right..