If government sets a maximum price below the equilibrium price: the market will be unaffected. the quantity supplied will be greater than the quantity demanded. the market will still be able to fulfil its rationing function.
Is maximum price below equilibrium?
A price below the maximum is acceptable, and no intervention would follow. A maximum price might be considered as providing a benefit to consumers, and while the price is capped below the market equilibrium it has the effect of contracting supply, and extending demand, and thus creates a shortage.
What is maximum price and minimum price?
Price controls can take the form of maximum and minimum prices. Maximum prices can reduce the price of food to make it more affordable, but the drawback is a maximum price may lead to lower supply and a shortage. Minimum prices can increase the price producers receive.
What will happen if maximum price is removed?
Removing a price ceiling will return equilibrium to its initial point. The price increases increasing quantity supplied while reducing the quantity…
What are minimum prices?
A minimum price is the lowest price that can legally be set, e.g. minimum price for alcohol, minimum wage.
What happens if the maximum price is set above the equilibrium price?
If the maximum price is set above the equilibrium price then it will have no effect. If the maximum price is set below the equilibrium price, it will cause a shortage – demand will be greater than supply.
When does the government set a maximum price?
A maximum price may be set where the government feels that the price is too high. For example, rent controls in the rented housing market could be used to prevent rents from rising to the equilibrium market level. Maximum prices are designed to benefit consumers. The effect of a maximum price is shown in Figure 1 below.
Is there a maximum price in the housing market?
Same with the housing market – if equilibrium rent charged is such that a lot of people are homeless, governments might set a maximum price in the housing market (mostly happens in developing countries) As you can see in the maximum price diagram above – it is set below the equilibrium price (P max < P1).
What happens if there is a maximum price of bread?
For example, the government may set a maximum price of bread of £1 – or a maximum price of a weekly rent of £150. If the maximum price is set above the equilibrium price then it will have no effect. If the maximum price is set below the equilibrium price, it will cause a shortage – demand will be greater than supply.
