Simple Application of Price Theory - SS2 Economics Lesson Note

Price theory is an important concept in economics that helps us understand how markets allocate goods and services. One application of price theory is the use of minimum and maximum price legislation, which can have important effects on market outcomes.

Minimum price legislation

Minimum price legislation, also known as price floors, is a government-imposed minimum price for a good or service. This is typically used to help support producers by ensuring that they receive a certain level of income for their products. However, minimum prices can also lead to surpluses if the price is set above the equilibrium price, as the quantity supplied exceeds the quantity demanded.

Maximum price legislation

Maximum price legislation, also known as price ceilings, is a government-imposed maximum price for a good or service. This is typically used to help consumers by ensuring that prices do not rise above a certain level. However, maximum prices can also lead to shortages if the price is set below the equilibrium price, as the quantity demanded exceeds the quantity supplied.