Maximum prices

• What is meant by a maximum price?

  A maximum price is a price ceiling for the market.
• What does the maximum price diagram look like?

  DIAGRAM BELOW:

  
• Why don’t suppliers want to supply as much as a result of a maximum price?

  Due to the lack of profit incentive.
• What happens to demand as a result of a maximum price?

  Demand increases due to lower prices.
• Give details on maximum prices:

  • Prices must be set below equilibrium price.
  • Demand has expanded & supply has contracted - excess demand.
  • maximum prices are set to encourage demand.
  • Maximum prices are not helpful for producers as it lowers the profit incentive.
  • Consumers benefit due to lower prices so consumers are more attracted to the new prices.
• What occurs as a result of a maximum price?

  Demand expands and supply contracts causing excess demand.
• How could the government reduce excess demand?

  • Shift supply right - subsidise

  - However…

  -> Putting maximum price in first protects consumers because if subsidies are put in place after, producers may keep that extra money for profit rather than passing the lower prices onto consumers.
• What 3 things could maximum prices lead to?

  • black market
  • queuing
  • reduction in quality
• What are the arguments FOR maximum prices?
• What are the arguments AGAINST maximum prices?

  
  

  • May discourage entry into market
• What are the arguments FOR rent controls (maximum price)?

  • Protects consumers and makes property more affordable.
• What are are arguments against rent controls (maximum price)?

  • Less profit incentive so producers may be less willing to offer rent.
• What are the FORS for maximum price?


  • Encourages consumption of merit goods
  • Lowers prices - more competitive
  • Decreased inequality