Chapter 11: Maximum and Minimum prices

Where does the maximum price have to be set to have an effect in price

Below the market equilibrium

Benefits of maximum prices

Increases competition

Increases consumer welfare

Incentive for businesses to cut costs to maintain profits

Disadvantages of maximum prices

Reduce profits so reduces investment back into the businesses

Makes it harder for new firms to enter the market

Firms might raise price in other way

Alternative to maximum prices

Reduce barriers to entry in an industry

High taxes on supernormal profits

Where does the minimum price have to be set to have an effect on price

Above market equilibrium

Reasons for setting minimum wage

Increase incentive for people to work

Poverty reduction

Increases incentive for training to make it worth it paying a higher wage

Anti discrimination

Disadvantages of setting a minimum wage

May cause higher unemployment

Small business may struggle

Decrease international competitiveness

May cause inflation

What does the effect of the minimum wage depend on

PED of the firms services

State of the economy

Whether the minimum wage will actually motivate workers

Depends on the magnitude of the increase

Alternative to minimum wage

Provide a living wage which is inflation adjusted

Reducing income tax

Increase benefits of working

Take measures to raise labour productivity

Financial market

A market in which people trade financial securities and derivatives at low transaction costs

Forward market

A type of financial market where contract are made to buy or sell an asset at a predetermined price at a specified future date