Supply and Demand - The control of prices
5 important questions on Supply and Demand - The control of prices
What wil happen when the government sets a minimum price above the equilibrium?
This is a price floor. There will be a surplus: Qs - Qd
What will happen when the goverment sets a maximum price below the equilibrium?
This is a price ceiling. There will be a shortage: Qd - Qs
Why does the government set (high) minimum prices? (6)
1. To protect producers' incomes
2. To create a surplus and store it for future shortages
3. To make sure wages don't go below a certain level
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What methods can the government use to deal with the surpluses?
1. Government could buy the surplus, detroy it or sell it abroad
2. Supply could be reduceer by setting a quota for producers
3. Demand could be rised by advertising, alternatives or by reducing consumption
Sometimes governments believe that a certain product should not be allocated by the market. The price mechanism is than disturbed. Name 5 causes?
1. Price floor (minimum wage)
2. Price ceiling (rent ceiling in the housing market)
3. Subsidies
4. Providing goods free to consumers (healthcare/education)
5. Market products illegal (weapons/drugs)
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