Fichas
1.4.1 minimum & maximum prices
Fichas del conjunto (25)
- 1What is meant by maximum price?A legal price ceiling imposed on producers which they cannot charge above
It is illegal for firms to charge above the price cap - 2What is the purpose of maximum price?A maximum price is used to encourage consumption of necessities and merit goods
Also to prevent monopolies from exploiting consumers by charging high prices for essentials - 3What is the diagram for maximum price?
- 4Analyse the impact of maximum price on consumersLower market price
Demand expands and increases
Greater consumer surplus and utility - 5Analyse the impact of maximum price on producersLower market price
Market supply contracts and decreases
Firms are less profitable - 6Analyse the impact of maximum price on GovernmentIncrease in consumption of goods with positivenexternalities – Better allocation of resources from a social welfare perspective
– Corrected market failure! - 7Evaluate maximum prices- set above the equilibrium price1.If the maximum price is set above the free market price it will not be effective
- 8Evaluate maximum prices- shortage in the marketMaximum prices may lead to as shortage in the market. This means that consumers are unable to access the product. For example, shortage of places at university
- 9Evaluate maximum prices- Time periodHow long is the price cap imposed for?
- 10Evaluate maximum prices-magnitudeDepends on what the minimum price is set at will prices rise by 5% or 30%
- 11Evaluate maximum prices- ElasticityDemand for alcohol is price inelastic. Consumers are not very responsive to a change in price due to alcohol addiction. This may mean the government intervention is not very effective as minimum price will not cause consumption to fall
- 12What is meant by minimum prices?A legally imposed price floor which producers cannot charge below
It is illegal for firms to sell certain products below the (minimum) floor price - 13What is the purpose of minimum prices?A minimum price is used to discourage the consumption of goods with negative externalities
Also to prevent producers from exploiting workers by giving them an unfair wage - 14Draw the diagram for minimum prices
- 15Analyse the impact of minimum prices on consumersLeads to a higher market price
Demand contracts and falls
Lower consumer surplus and utility - 16Analyse the impact of minimum prices on producersHigher market price
Market supply expands and increases
Firms are more profitable - 17Analyse the impact of minimum prices on the governmentDecrease in consumption of goods with negative externalities – Betterallocation of resources from a social welfare perspective –Corrected market failure!
- 18Evaluate minimum prices.- set below equilibrium1.If the minimum price is set below the market price it will not be effective
- 19Analyse the impact of the government imposing a guaranteed minimum price on commodities - Grade AIn the primary sector (extracting raw materials), prices are very volatile. This is because supply is price inelastic and market production is dependent on season/weather. This leads to significant fluctuations in price. To help farmers, the government put a minimum price on primary commodities. This is done to stabilise prices for farmers. In some cases, minimum prices takes the form guaranteed minimum price at
which the government or a purchasing agency will buy the products of me farmer. When there is a surplus in stock the government buy the surplus and stockpile it. In order to benefit producers. - 20Evaluate minimum prices- surplus in stock2.Minimum prices may lead to a surplus of stock in the market - Leading to a shadow economy. A higher market price signals to producers to increase market supply
Some producers may sell at a price below the minimum price illegally - 21Evaluate minimum prices- elasticity3.Elasticity – Demand for alcohol is price inelastic. Consumers are not very responsive to a change in price due to addiction. This may mean the government intervention is not very effective as a minimum price will not cause consumption to fall by much.
- 22Evaluate minimum prices- Alternative methods of government intervention4.Alternative forms of government intervention can be used to discourage consumption of demerit goods – e.g. indirect taxation & advertising (info gap) & regulation
- 23Evaluate minimum prices- magnitude6. Depends on what level the minimum price
is set at. Will prices rise by 5% or 30%?
If the prices barely rise- the minimum price becomes ineffective - 24Evaluate minimum prices- scope5. Scope(how many people are impacted by it)-low income households are more impacted by the minimum price. This is because it would take a large proportion of their income. High income households have a lot more disposable income so minimum price has little to no effect on them
- 25Analyse the impact of the government imposing a guaranteed minimum price on commodities