Advantages of a maximum price | Black market & a maximum price | Calculations & a maximum price | Ceiling Price | Maximum Price Control | Reasons for a maximum price
Explain how the market has been affected by the maximum price. Be specific.
The price has decreased from $450 to $350. There will be a shortage of 3 000 houses. Quantity supplied falls by 1 000 houses. The value of sales changes by $700 000 (decrease).
A government measure that does not allow to price to automatically move back to the equilibrium as it would in the free market because laws of regulations prohibit this is termed a:
In the interest of lower income groups would the government set a maximum or minimum price on items of mass consumption?
A maximum (ceiling) price.
Referring to the graph, fully explain the consequences of a Maximum Price Control on the market for houses for rent. Include the following: quantity demanded before and after the price control/ quantity supplied before and after the price control/ a problem the price control might create and a possible solution for the problem outlined.
The consequences of the Maximum Price Control on houses for rent is that the quantity demanded before the price control was 3500 houses and after 4000 houses. The quantity supplied of houses decreases from 3500 houses to 2500 houses. A problem created by the price control is a shortage of 1500 houses. A black market could arise because some customers are willing to pay a higher price that the legally set price of $350. Possible solutions to the shortage could be first-in-first-served, rationing or the government could give producers a subsidy and increase supply.
The government wants to reduce the cost of houses for rent for consumers. A price control and subsidy could achieve the same market price of $350 but have different effects on the quantity supplied. (i) How much would a subsidy have to be to achieve a market price of $350? (ii) For the subsidy option and maximum price calculate the change in quantity supplied.
(i) It will require a $150 per unit subsidy. (ii) Price control (maximum price) option is 1 000 houses decrease. Subsidy option is 500 houses increase
Explain how a government price control measure can reduce the availability of houses for consumers to rent?
A maximum price is where the government prohibits charging a price higher than a certain level. An effective maximum price control does not allow the market to clear (ie, a shortage is created) and some consumers may miss out. A maximum price control will cause the price of the good to fall and result in less houses available for rent because landlords decrease the quantity supplied of homes due to the decrease in the price.
The government wants to reduce the cost of cycle helmets for consumers. A price control and subsidy could achieve the same market price of £30 but have different effects on the quantity supplied. (i) How much would a subsidy have to be to achieve a market price of £30? (ii) For the subsidy option and maximum price calculate the change in quantity supplied.
(i) It will require a £20 per unit subsidy. (ii) Price control (maximum price) option is 1 000 helmets decrease. Subsidy option is 1 000 helmets increase