Advantages of a maximum price | Black market & a maximum price | Calculations & a maximum price | Ceiling Price | Maximum Price Control | Reasons for a maximum price
The market equilibrium is $10. If the government imposes a maximum price of $7, quantity demanded will ___________, quantity supplied will __________ and the price will __________.
increase; decrease; decrease. A maximum price is a price control set by government prohibiting the charging of a price higher than a certain level, it is set in the interests of consumers. When the government sets an effective maximum price control below the equilibrium, the quantity demanded will increase, quantity supplied will decrease and will price decrease.
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.
What would happen to equilibrium price and quantity if the maximum price was $120 and equilibrium $100?
No change in equilibrium price and equilibrium quantity. Because the maximum price is above the equilibrium price the price can still fall and therefore the equilibrium price and equilibrium quantity will not change.
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
Explain what will happen if the government establishes a price ceiling at P3?
If the government imposes a maximum (ceiling) price of P3 on a product this will have no effect because the market will clear and re-establish itself at a price of P2 and quantity of 700.
A government measure that prohibits the charging of a price higher than a certain level is termed a:
Maximum price control (ceiling price).
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: