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Wednesday, 05 March 2014 20:51

Maximum and Minimum Prices

Maximum and Minimum Prices

Governments can intervene in a market in many ways. They usually do so because there is some form of market failure. The free market is creating too little of a good or too much and charging the wrong price. One way that governments can attempt to fix this is to impose a maximum or a minimum price. This is done on MOTs and rents for social housing as well as being proposed as a solution to the overconsumption of alcohol.

By imposing a maximum price below the market price, firms are forced to reduce what they charge and so demand increases. Unfortunately this is not a particularly successful solution as firms will offer less for sale than before. We have managed to increase demand but supply has fallen and a shortage has been created. It does mean that access to the good or service is no longer on the basis of who has the money to pay but waiting lists or black markets are likely to result.

Similarly, a minimum price reduces the amount consumers wish to purchase but increases the amount that firms make, creating a surplus, wasting resources and risking the creation of a black market.

The tutorial below will show you how to draw the diagrams involved.

Unfortunately at the moment the tutorials are only available using flash so they may not work on mobile devices.

 

Published in Diagram Clinic
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