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34 Cards in this Set
- Front
- Back
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Def of macro economics |
These are government polices fo influences the behaviour of the individual economic units |
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What’s minimum price control |
This is a prices fixed by the government above the equilibrium price. This is imposed to safeguards the income of producers. This allows produces to sell products at the minimum price or any other price above. When the price is fixed by the government, it prevents the market forces to adjust back to equilibrium. Even though the market may operate at disequilibrium. |
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Why does a government set a minimum price control |
1) agricultural goods. Government can set a minimum price control to protect producers, especially agricultural produces . When the price set by the market forces is relatively low and may discourage further production 2) imported goods which have close substitutes produced locally in the domestic market. This helps protect infant industries from foreign competition 3) wages. This is to prevent exploration of low paid workers because many of these workers do not belong to trade unions that can protect their rights 4) reduce consumption. Of demerit goods. As this will make the product relatively expense and a fall in purchasing power of individuals |
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Problems of minimum price control |
1) reduces individual purchasing power. This reduces Qd. 2) it leads to surplus, this can lead to wastage of resources 3) it can lead to black market, where produces will be forced to sell their product at a lower price below the minimum price. For fear that excess supply may lead to a wastage of resources |
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Problems of minimum price control |
1) reduces individual purchasing power. This reduces Qd. 2) it leads to surplus, this can lead to wastage of resources 3) it can lead to black market, where produces will be forced to sell their product at a lower price below the minimum price. For fear that excess supply may lead to a wastage of resources |
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How does the government respond to surplus of resources |
The government should run a buffer stock scheme where they insure the price remains stable and fixed by buying the excess supply and stock then they’re ready. Although this may be costly to store the products, may create opportunity cost. |
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Problems of minimum price control |
1) reduces individual purchasing power. This reduces Qd. 2) it leads to surplus, this can lead to wastage of resources 3) it can lead to black market, where produces will be forced to sell their product at a lower price below the minimum price. For fear that excess supply may lead to a wastage of resources |
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How does the government respond to surplus of resources |
The government should run a buffer stock scheme where they insure the price remains stable and fixed by buying the excess supply and stock then they’re ready. Although this may be costly to store the products, may create opportunity cost. |
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When is minimum price control ineffective |
This is when the market will automatically adjust back to equilibrium price and this will mean that the product will be night at equilibrammo price and the government may not schedule of setting minimum control. If the price set by the forces of demand and supply is too low, it’ll adjust back to equilibrium |
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Def of maximum price control |
This is a piece fixed by the government below the equilibrium price to make goods more affordable in the society. |
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Def of maximum price control |
This is a piece fixed by the government below the equilibrium price to make goods more affordable in the society. |
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What can maximum control prices be used upon |
1) essential goods, consumed by many people. Without maximum price some people may be unable to afford the good. By reducing price, it can help reduce relative poverty. the drawback is a maximum price may lead to lower supply and a shortage. 2) housing, especially rents controls , to prevent them from becoming too expensive
3) Monopoly exploitation. If firms have monopoly power, they can charge high prices to consumers – A maximum price can be a way of reducing ‘monopoly prices’
4) services provided b utilities such as water |
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What happens when government imposes max price on a certain good |
It can discourage supply and encourage demand. This can leads to shortage of the product in the market, which Means that that not all consumers will be able to purchase the product. |
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What happens when government imposes max price on a certain good |
It can discourage supply and encourage demand. This can leads to shortage of the product in the market, which Means that that not all consumers will be able to purchase the product. |
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Problems of mAx price |
1) Queues. People will ends up queuing go try and get the gods before it sells out. This will encourage people to spend longer time in queues to buy the product before it runs out. This time spent queuing represents a significant cost in terms of time. 2) encourages black market. Because of the shortage, it creates the incentive to develop a ‘black market’ where people illegally trade the good. People will be willing to pay a higher than max price to get the product could lead to corruption and bribery of those who are responsible for regulating queues 3) Shortage maximum price distorts the market and leads to disequilibrium. The demand is greater than supply meaning many consumers will be unable to get the product at all. Cheap rents are no good if it leaves many people homeless. |
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Def of subsides |
These are financial support given by government in order to reduce the cost of production and Lowe the prices of goods A reduction in cost will motivate more production. This will also prevent declining industries from closing down. This can protect employment and increase GDP |
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How can a subsidy become effective |
Subsidy reduces prices making essential goods more affordable to the majority in the society. Subsided can also be used to encourage production and consumption merit goods. Since these goods have external benefits. For a subdivision to be effective, the government should provide a subsidy equal to EB. This will restore consumption and production at SB |
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Explain the graph |
Subsisdy per unit is E2N and the benefit to producers is the rectangle up and the benefit to consumers is the rectangle below |
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What will the incident of subsidy depend on |
The elasticity of supply and demand for a product |
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What will the incident of subsidy depend on |
The elasticity of supply and demand for a product |
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What occurs when the subsidy given to a product has a elastic demand |
Subsidy will lead to a small reduction in price but large increase in consumption. From the above diagram, The incidence of subsidy will be more in producers than on consumers. |
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What will the incident of subsidy depend on |
The elasticity of supply and demand for a product |
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What occurs when the subsidy given to a product has a elastic demand |
Subsidy will lead to a small reduction in price but large increase in consumption. From the above diagram, The incidence of subsidy will be more in producers than on consumers. |
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What happens when the deman of the subsidy is inelastjc |
Subsidy will lead to a large reduction in price and small increase in consumption |
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What happens when the deman of the subsidy is inelastjc |
Subsidy will lead to a large reduction in price and small increase in consumption The incidence of subsidy is smaller on producers and larger on consumers |
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When is maximum price said to be ineffective |
This occurs when the maximum price is above the equilibrium price. The market will automatically adjust back to equilibrium and the producers will sell their product at equilibrium price |
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When is maximum price said to be ineffective |
This occurs when the maximum price is above the equilibrium price. This will have no effect since The market will automatically adjust back to equilibrium and the producers will sell their product at equilibrium price |
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When is maximum price said to be ineffective |
This occurs when the maximum price is above the equilibrium price. This will have no effect since The market will automatically adjust back to equilibrium and the producers will sell their product at equilibrium price |
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Problems of maximum price |
Shortage. A maximum price distorts the market and leads to disequilibrium. The demand is greater than supply meaning many consumers will be unable to get the product at all. Cheap rents are no good if it leaves many people homeless. Encourages black market. Because of the shortage, it creates the incentive to develop a ‘black market’ where people illegally trade the good. People could buy the good at the low maximum price and then resell to those customers who were unable to buy. This is potentially quite lucrative as some of those customers who missed out may be willing to pay a very high price. Queues. One consequence of a maximum price is that people will end up queuing to try and get the good before it sells out. This will encourage people to spend longer and longer in queues before it runs out. This time spent queuing represents a significant cost in terms of time. |
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Example of maximum prices |
Maximum price for rent. Governments have tried different types of rent control – keeping the cost of renting below a certain level. However, a maximum price may reduce the supply of housing leading to homelessness. |
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Evaluation of maximum price |
The most effective way to implement maximum prices would be to also try and deal with the supply. If housing is too expensive, a long-term solution is to build more affordable housing – and not just rely on maximum prices.
Maximum prices may be most useful in the case of a monopoly who is both restricting supply and inflating prices. |
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Example of minimum price |
example, they are used to increase the income of farmers producing food.
The EU had a Common Agricultural Policy (CAP) which aimed to increase the income of farmers by setting minimum prices. |
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Example of minimum price |
example, they are used to increase the income of farmers producing food.
The EU had a Common Agricultural Policy (CAP) which aimed to increase the income of farmers by setting minimum prices. |
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Problems of subsidy |
It would be expensive; the government would have to raise a significant amount of tax revenue. There is an argument that when government subsidises firms, it reduces incentives for firms to cut costs. For this reason, it is argued that a government should avoid subsidising firms unless there is a clear social benefit to subsidising firms. For example, a firm that develops environmentally friendly technology may be able to give society a net positive externality – and this could justify a government subsidy. |
