Maximum and minimum prices Cambridge IGCSE Economics revision
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In plain words
Sometimes a government decides the market price is wrong and sets a legal limit. A maximum price says "no higher than this", to keep something affordable. A minimum price says "no lower than this", to protect producers or to put people off buying.
Either way the market can no longer clear, so there is a side effect: a shortage or a surplus.
4 things to know
- A maximum price (a price ceiling) only has an effect if it is set below the equilibrium price. Demand then exceeds supply: a shortage.
- A shortage leads to queues, waiting lists and illegal markets where the good is sold above the legal price.
- A minimum price (a price floor) only has an effect if it is set above the equilibrium price. Supply then exceeds demand: a surplus.
- Maximum prices are used for essentials such as rent and basic foods. Minimum prices are used to support farmers' incomes, or to discourage demerit goods such as alcohol.
Worked example
The equilibrium price of bread is $3. The government sets a maximum price of $2. At $2, 900 loaves are demanded and 600 are supplied. What is the result?
- The maximum price is below the equilibrium, so it has an effect.
- Demand (900) is greater than supply (600).
- There is a shortage of 900 − 600 = 300 loaves.
Tips and tricks
- Maximum is below, minimum is above. It sounds the wrong way round, so learn it: a maximum price is a low price.
- When you draw it, mark the gap between the two curves at the controlled price, and label it shortage or surplus.
It lands in your notebook with its questions as flashcards.
Maximum and minimum prices: 5 questions and answers
These are the quiz’s questions. Do the quiz first, then come back here for the ones that got you.
To have any effect, a maximum price must be set
Above the equilibrium, the market price is already within the limit.
What does an effective maximum price cause?
At the low price, more is demanded than firms are willing to supply.
A government sets a minimum price for wheat above the equilibrium. What happens?
Farmers supply more at the higher price and consumers buy less.
Why might a government set a minimum price for alcohol?
A higher price leads to a contraction in demand.
Which is a likely result of a maximum price on concert tickets?
A shortage gives people a reason to resell above the legal price.
Quiz
5 questions
Tap an answer and you’ll see straight away whether it’s right, and why.
Worksheet
3 questions, 8 marks. Write your answers on paper, then check them.
Maximum and minimum prices
Cambridge IGCSE Economics 0455 · 8 marks · papermunch.org
Name ______________________________ Date ______________
Define a maximum price.[2]
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A legal upper limit on price, set by the government, above which a good cannot be sold.
At a minimum price of $5 per kilogram for rice, farmers supply 800 tonnes and consumers demand 550 tonnes. Calculate the surplus and suggest how the government might deal with it.[3]
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Surplus = 800 − 550 = 250 tonnes. The government could buy the surplus and store it, which costs taxpayers money.
Explain why a maximum price on rented housing may harm some of the people it is meant to help.[3]
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At the lower rent more people want to rent, but landlords supply fewer homes, so there is a shortage. Some people cannot find anywhere to rent at all.
Answers: Maximum and minimum prices
- 1. A legal upper limit on price, set by the government, above which a good cannot be sold.
- 2. Surplus = 800 − 550 = 250 tonnes. The government could buy the surplus and store it, which costs taxpayers money.
- 3. At the lower rent more people want to rent, but landlords supply fewer homes, so there is a shortage. Some people cannot find anywhere to rent at all.