PRICE CONTROLS THE PRICE IS NOT FREE TO AUTOMATICALLY MOVE BACK TO EQUILIBRIUM

GOVERNMENT INTERVENTION Sometimes the government will intervene in a market to determine the price as the outcome could be seen as unfair (to consumers- too high, or producers- too low). E.g. Minimum wage (currently at $12.50)

MINIMUM PRICE (FLOOR PRICE) A minimum price is set in a market above the equilibrium as it is seen as being unfair to the suppliers in that particular market. This price must be above equilibrium to be effective. Minimum Price (Floor Price) A price that a product cannot be sold for less than

EXAMPLE The government places a minimum price of $250 on air flights At this price the quantity demanded is seats and the quantity supplied is seats As a result of the new minimum price (above equilibrium) QS>QD so a surplus of is created Pmin QD QS surplus

EFFECTS ON CONSUMERS Effect on Consumers Price paid before the price minimum ________ Price paid after the price minimum _________ Quantity consumed/demanded before price minimum ________ Quantity consumed/demanded after price minimum _________ The minimum price has caused the price consumers pay to increase this causes the quantity demanded to fall as the good is now less affordable. $200 $250 $ $15 000

EFFECT ON PRODUCERS Effect on Producers Price received before the price minimum ________ Price received after the price minimum _________ Quantity supplied before price minimum ________ Quantity supplied after price minimum _________ Quantity sold before price minimum _____ Quantity sold after price minimum _____ The minimum price has caused the price producers receive to increase, this causes the quantity supplied to increase as the good becomes relatively more profitable. However, the quantity sold falls so firms may lay off workers as sales, revenue and profits fall. $200 $250 $ $ $ $15 000

EFFECT ON GOVERNMENT As firms lay off staff, the government may have to pay more transfers (benefits) to the unemployed

S D Minimum price QeQe PePe Qs Qd Price ($) Quantity (units) surplus As a result of the new minimum price (above equilibrium) a surplus has now been created.

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MAXIMUM PRICE (CEILING PRICE) Maximum prices are used to protect our consumers from having to pay ridiculously high prices for certain goods and services. Usually placed on Merit Goods. A maximum price will be set below equilibrium, otherwise it will not be effective. Maximum Price (Ceiling Price) A price that a product cannot be sold for more than

MAXIMUM PRICE EXAMPLE The government places a maximum price of $1.80 on Milk At this price the quantity supplied litres of milk and quantity demanded is litres of milk As a result of the new maximum price (below equilibrium) QD>QS so a shortage of is created pmax QSQD Shortage

EFFECT ON CONSUMERS Effect on Consumers Price paid before the price maximum ________ Price paid after the price maximum _________ Quantity demanded before price maximum ________ Quantity demanded after price maximum _________ Quantity consumed before price maximum ________ Quantity consumed after price maximum _________ The price maximum has caused the price consumers pay to decrease, this has caused the quantity demanded for milk to rise from to litres as milk is now relatively more affordable. However the amount of milk consumed falls from to litres as a shortage is created. As a result a black market may be created. $2.20 $ litres litres litres litres

EFFECT ON PRODUCERS Effect on Producers Price received before the price maximum ________ Price received after the price maximum _________ Quantity supplied/sold before price maximum ________ Quantity supplied /sold after price maximum _________ The price maximum has caused the price received by producers to fall, this has caused the quantity supplied by producers to fall from litres of milk to litres of milk. As milk is now relatively less profitable to produce. Firms may switch to producing a more profitable related good, or may lay off staff as sales, revenues and profits fall. $2.20 $ litres litres

EFFECT ON THE GOVERNMENT As firms begin to lay off workers the government may need to increase transfer payments (benefits) as more people become unemployed. As a shortage is created the government may have to provide a rationing system so that all consumers get a equal share e.g. can only buy 2 litres of milk per household a day.

S D Maximum price QeQe PePe Qd Qs Price ($) Quantity (units) shortage As a result of the new maximum price (below equilibrium) a shortage has now been created.

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