Theory question 103
Price DeterminationSection B: answer four questions only from this section.
What would be the economic consequences if prices were fixed by the government?
Show the model answer
Maximum price (fixed below equilibrium): excess demand / shortages
Black markets and hoarding develop
Rationing, queues and favouritism in distribution
Producers may cut supply or quality; less investment in the industry
Minimum price (fixed above equilibrium): excess supply / surplus
Government may have to buy and store the surplus; waste of perishable goods
A minimum wage above equilibrium causes unemployment
Prices no longer reflect relative scarcity, so resources are misallocated
Consumers on low incomes may benefit from cheaper essential goods; farmers may gain from guaranteed minimum prices
Diagrams of a price ceiling and a price floor earn marks
Treat maximum and minimum prices separately, with diagrams.