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NSS Exploring Economics 1 (3 Edition) : Revision Notes

1. The document discusses different types of government intervention in markets: price ceilings, price floors, and quotas. 2. A price ceiling sets a maximum price and leads to a shortage if set below the equilibrium price. A price floor sets a minimum price and causes a surplus if set above the equilibrium. 3. Quotas set a maximum quantity and are effective only if below the equilibrium quantity, causing price to rise and quantity to fall.

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148 views3 pages

NSS Exploring Economics 1 (3 Edition) : Revision Notes

1. The document discusses different types of government intervention in markets: price ceilings, price floors, and quotas. 2. A price ceiling sets a maximum price and leads to a shortage if set below the equilibrium price. A price floor sets a minimum price and causes a surplus if set above the equilibrium. 3. Quotas set a maximum quantity and are effective only if below the equilibrium quantity, causing price to rise and quantity to fall.

Uploaded by

rrrrr88888
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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NSS Exploring Economics 1 (3rd Edition)

Revision Notes

Chapter 6 Government intervention (I)

Price ceiling (maximum price control)

1. A price ceiling is the maximum price allowed by the government.

2. A price ceiling is effective only if it is imposed below the equilibrium price.

3. Effects of an effective price ceiling:

Price
S

P0 Shortage

P1 Price ceiling
D
0 Quantity
Q1 Q0 Q2

Before price ceiling After price ceiling


Price P0 P1 ()
Quantity transacted Q0 Q1 ()
Total revenue P0 × Q0 P1 × Q1 ()

4. As an effective price ceiling creates excess demand (or shortage), the good may be allocated to
buyers by the following methods:
a. Non-price competition among buyers (e.g., queuing)
b. Price competition among buyers
i. Extra fees to sellers
ii. Black market: Goods are sold at prices higher than the legal maximum.

5. A price ceiling is ineffective if it is imposed above the equilibrium price. There will be no
effects on price, quantity transacted and total revenue.

NSS Exploring Economics 1 (3rd Edition) 1 © Pearson Education Asia Limited 2019
Revision Notes (Chapter 6)
Price floor (minimum price control)

6. A price floor is the minimum price allowed by the government.

7. A price floor is effective only if it is imposed above the equilibrium price.

8. Effects of an effective price floor:


Price

Surplus S
P1 Price floor

P0

D
0 Quantity
Q1 Q0 Q2

Before price floor After price floor


Price P0 P1 ()
Quantity transacted Q0 Q1 ()
P 1 × Q1
 Elastic demand: TR 
Total revenue P0 × Q0  Inelastic demand: TR 
 Unitarily elastic demand:
TR remains unchanged

9. As an effective price floor creates excess supply (or surplus), sellers have to compete to sell by
the following methods:
a. Non-price competition among sellers
b. Price competition among sellers
i. Extra fees to pay buyers
ii. Illegal price cutting: Goods are sold at prices lower than the legal minimum.

10. A price floor is ineffective if it is imposed below the equilibrium price. There will be no effects
on price, quantity transacted or total revenue (consumers’ total expenditure).

NSS Exploring Economics 1 (3rd Edition) 2 © Pearson Education Asia Limited 2019
Revision Notes (Chapter 6)
Quantity control: Quota

11. A quota is the maximum quantity supplied of a good that the government allows.

12. A quota is effective only if it is imposed below the equilibrium quantity. The supply curve is
kinked.

13. Effects of an effective quota:


Price
Sq
S
P1

P0

D
0 Quantity
Q1 Q0

Before quota After quota


Price P0 P1 ()
Quantity transacted Q0 Q1 ()
P 1 × Q1
 Elastic demand: TR 
Total revenue P0 × Q0  Inelastic demand: TR 
 Unitarily elastic demand:
TR remains unchanged

14. When an effective quota is imposed, the average quality of the product increases.

15. A quota is ineffective if it is imposed above the equilibrium quantity. There will be no effects on
price, quantity transacted or total revenue.

NSS Exploring Economics 1 (3rd Edition) 3 © Pearson Education Asia Limited 2019
Revision Notes (Chapter 6)

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