The allocation of resources - Price determination (3)
Resources |
Revision Questions |
Economics
Login to see all questions
Click on a question to view the answer
1.
Suppose the government introduces a price ceiling on a particular good. Explain the likely impact of this price ceiling on the market. Consider both the intended and unintended consequences.
A price ceiling is a legal maximum price that can be charged for a good or service. The likely impact of a price ceiling is to create a shortage.
Intended consequence: The price ceiling is intended to make the good or service more affordable for consumers. It aims to protect consumers from high prices.
Unintended consequences:
- Shortage: Because the price is artificially capped below the equilibrium price, the quantity demanded will exceed the quantity supplied. This leads to a shortage.
- Black markets: A shortage can create black markets where the good is sold illegally at prices above the price ceiling.
- Reduced quality: Producers may reduce the quality of the good or service if they are unable to raise prices.
- Inefficient allocation: The price ceiling prevents the market from efficiently allocating resources.
2.
The following demand and supply schedule shows the market for apples in the village of Little Puddleton.
| Price (£) |
| Quantity Supplied (kg) |
| Price (£) |
| Quantity Demanded (kg) |
| Price (£) |
| Quantity Supplied (kg) |
| Price (£) |
| Quantity Demanded (kg) |
| Price (£) |
| Quantity Supplied (kg) |
| Price (£) |
| Quantity Demanded (kg) |
a) Calculate the equilibrium price and quantity for apples in Little Puddleton. Show your working.
b) Suppose the price of pears increases. Explain, using a demand and supply diagram, how this would affect the equilibrium price and quantity of apples in Little Puddleton. You should clearly label your diagram.
a) To find the equilibrium, we need to find the point where quantity supplied equals quantity demanded. Looking at the provided (but not fully populated) tables, we need to assume some values to demonstrate the calculation. Let's assume the following values are present in the tables:
Quantity Supplied (kg) at £2 per kg: 10
Quantity Demanded (kg) at £2 per kg: 15
Therefore, the equilibrium price is £2 and the equilibrium quantity is 10 kg.
Calculation: The equilibrium occurs where the supply and demand curves intersect. In this case, the equilibrium is where the quantity supplied (10kg) equals the quantity demanded (15kg) at a price of £2. This indicates a shortage.
3.
Question 2: Discuss how the price mechanism helps to decide how goods and services are produced in an economy. Consider the impact of factors such as technology and resource availability.
The price mechanism influences how goods and services are produced by incentivizing producers to adopt more efficient methods. When the price of a good is high, producers are motivated to find ways to reduce their costs of production. This often involves adopting new technologies that increase productivity, improving resource utilization, and streamlining production processes.
For example, if the price of steel rises, steel producers may invest in automated machinery to reduce labor costs and increase output per worker. Similarly, if a particular resource becomes scarce, producers will be incentivized to find alternative resources or to use existing resources more efficiently. The price of a good also reflects the availability of resources. If a resource is plentiful, its price will be low, making it more readily available for use in production. Conversely, if a resource is scarce, its price will be high, prompting producers to conserve it or seek substitutes.
Therefore, the price mechanism acts as a powerful signal, encouraging innovation and efficiency in production methods. Producers are constantly seeking ways to minimize costs and maximize output, and the price system provides the feedback necessary to guide these efforts. The availability of technology and resources further shapes production methods, with prices reflecting the relative scarcity and value of these factors.