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Maximum Price

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Venkata Sairam Mani Sravan Jakkireddy- SNIS182228
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36 views6 pages

Maximum Price

Uploaded by

Venkata Sairam Mani Sravan Jakkireddy- SNIS182228
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Price controls − maximum price

Key terms:

Price controls - a price intervention applied by governments. Price controls come in two
types - maximum price controls and minimum price controls.

Maximum price / price ceiling - when a government sets a maximum price, below the
equilibrium price. This forms a price ceiling for the good or service. Firms cannot charge
beyond this price and the policy is designed to protect consumers from exploitation.

Shortage - when the market for a good or service is not in equilibrium because demand
for the product is greater than supply.

Rent controls - a price ceiling applied to the rental housing market.

Activities

1. The diagram below illustrates the market for bread in a middle income nation. The
government decides to place a maximum price on the product.

(a) Illustrate the effect of the price


ceiling on the market for bread.

(b) Indicate the size of the bread


shortage resulting from the price
ceiling.

(c) One solution to the shortage is for


the government to provide a subsidy
for the product. Illustrate this on the
diagram.

(d) What is the opportunity cost of the


decision to make a direct payment to
the bread companies?

(e) Why might a government impose a price ceiling on certain public services e.g. public
transport, internet, power or water supplies.

© Mark Johnson,
InThinking www.thinkib.net/Economics 1
Activity 2

Watch the first half of this short video (up to 1.50 minutes) and then complete the activity
which follows:

(a) How does a price ceiling effect both producer and consumer surplus?

(b) Why must the price ceiling be drawn below the equilibrium price level?

Activity 3: Rental controls

A government wishes to impose rent


controls on housing in its capital city.
This is an attempt to increase the
quantity of low cost housing available
for rent.

(a) Illustrate the effect of the maximum


rental price on a supply and demand
diagram, illustrating the area of
shortage, following the rent control.

(b) Outline the impact of the rent


controls on the following stakeholders:

(i) Home owners who wish to rent out


their properties

(ii) Low income tenants

(iii) Wealthy tenants wishing to locate a new house in a popular district within the city

(iv) House builders based in the city.

© Mark Johnson,
InThinking www.thinkib.net/Economics 2
Activity 4

Watch the following two short videos that your teacher will show you and then decide
whether rental controls, in areas of high demand for housing are effective or not? Are there
other policies that might be effective in improving the affordability of housing in high
demand areas?

Argument in favour of rental controls

Arguments against rental controls

Activity 5: Price ceilings for premier events

During the 2012 Olympics tickets to the premium events were heavily over subscribed. This
was particularly true for the main athletic events, where tickets were sold on the black market
for three or four times their face value. The government response was to impose strict limits
on ticket sales, with customers limited to a maximum of two tickets per customer.

1. Draw a supply and demand diagram


for the premier athletic events,
illustrating the impact of the maximum 2
ticket per customer policy.

2. Analyse the benefits and costs of the


above policy. Who benefits and who
loses out from restricting sales to 2
tickets per person?

3. What other policies could the Olympic organisers have implemented to reduce the excess
demand for certain events?

© Mark Johnson,
InThinking www.thinkib.net/Economics 3
Activity 6

Watch the following short video and then answer the questions that follow:

The diagram above illustrates the market for a good with unitary PES and PED.

(a) Draw a price ceiling on the diagram and illustrate the change in consumer and producer
surplus.

(b) Illustrate the size of the deadweight loss as a result of the price ceiling.

(c) Explain why the price ceiling has created deadweight loss.

Activity 7

Watch the following video on the impact of price controls on a macro economy and then
decide whether or not price controls can ever be effective in a modern economy?

© Mark Johnson,
InThinking www.thinkib.net/Economics 4
Activity 8 (HL only)

Demand and supply for bread in a middle-income country is represented by the following
table:

Price ($) Demand (m) Supply (m)


1 18.0 3.0
1.5 15.5 5.5
2 13.0 8.0
2.5 10.5 10.5
3 8.0 13.0
3.5 5.5 15.5
4 3.0 18

(a) Complete the table by adding in the missing blank spaces and highlight the equilibrium
price and then illustrate the data on a demand and supply diagram, using the graph paper
included.

(c) The government decides to impose a price ceiling of $ 1.5, on the product, in an attempt
to make the good affordable for more households. Illustrate this on the diagram, indicating
the area of shortage and the size of the deadweight loss.

(d) To correct the deadweight loss the government decides to place a subsidy on the
good. Illustrate this on the diagram and calculate the cost of the subsidy.

(e) Describe the opportunity cost of the government subsidy?

© Mark Johnson,
InThinking www.thinkib.net/Economics 5
Activity 9: Link to the assessment

Typical paper one question:

Part (a)

Explain using a diagram how the introduction of a maximum price may impact on the market
for food. [10 marks]

Part (b)

Using real-world examples, evaluate the advantages and disadvantages of a government


decision to impose a price ceiling on rental property within a city. [15 marks]

© Mark Johnson,
InThinking www.thinkib.net/Economics 6

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