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 what is meant by the term price controls.
Government imposes a price control (minimum or maximum price), where price cannot automatically move back to the equilibrium as it would in the free market, because regulations or laws prohibit this.
How would you calculate the change in the quantity supplied after a maximum price is imposed?
Work out the difference between Q and Qs.
How would you calculate the change in the total value of sales after a maximum price is imposed?
Work out (P x Q) difference (Maximum price x Qs)
Referring to the graph, fully explain the consequences of a Maximum Price Control on the market for cycle helmets. Include the following: (i) quantity demanded before and after the price control (ii)quantity supplied before and after the price control (iii)a problem the price control might create and a possible solution for the problem outlined.
The consequences of the Maximum Price Control on cycle helmets is that the quantity demanded before the price control was 4000 cycle helmets and after 5000 cycle helmets. The quantity supplied decreases from 4000 cycle helmets to 3000 cycle helmets. A problem created by the price control is a shortage of 2000 cycle helmets. A black market could arise because some customers are willing to pay a higher price that the legally set price of £30. Possible solutions to the shortage could be first-in-first-served, rationing or the government could give producers a subsidy and increase supply.
Explain why a maximum price control set at above the market equilibrium would have no effect.
A price above the market equilibrium means that the equilibrium can still be reached / there will be a surplus so price will reduce to equilibrium / market forces cause price to decrease.
To protect consumers from paying unreasonably high prices for essential goods and services, would the government set a maximum or minimum price?
A maximum (ceiling) price.
(i) How much has the quantity of cycle helmets being supplied to the market changed? (ii) What was the change in total value of sales after the maximum price was imposed?
(i) Q vs Qs, 4 000 vs 3 000 = 1 000 helmets decrease. (ii) (P x Q) vs (Pmax x Qs) = £40 x 4 000 vs 30 x 3 000 = £160 000 vs £90 000 = £70 000 decrease