When a price ceiling is set below the equilibrium price, quantity demanded will exceed quantity supplied, and excess demand or shortages will result.

What happens when the government not a market sets the price above or below the market equilibrium price?

If the ceiling is set below market price, however, there will be a shortage of goods. If the government puts in a price ceiling, we can see that the quantity demanded will exceed the quantity supplied, meaning that not enough bread will be supplied to satisfy demand.

How does government finance affect both political and market equilibrium?

The government finance can affect political equilibrium in that, different parties compete with each other over policies that voters care about. The government can also introduce price ceilings in the market, which can reduce the market equilibrium price and increase the quantity.

What happens when the government sets minimum prices?

This is when the government don’t allow prices to go below a certain level. If minimum prices are set above the equilibrium it will cause an increase in prices. For example, the EU has used minimum prices for agriculture. It is argued farmer’s incomes are too low.

How does the UK government limit price increases?

Limiting price increases – In a privatised monopoly (e.g. electricity, gas, water – where there is no competition) the government regulator may play a role in limiting how much prices can be increased. In the UK, regulators use a formula like RPI-X.

How does the government set prices in a command economy?

Direct price setting. In a command economy (Communist) the government play an important role in deciding what to produce, how to produce and what prices to charge. In this situation, market forces are ignored and the government set the most ‘socially efficient’ prices.

How are minimum prices used to stabilize prices?

To stabilise prices (e.g. prevent rapid fluctuations in the price of food) A minimum price is when the government don’t allow prices to go below a certain level. If minimum prices are set above the equilibrium it will cause an increase in prices. For example, the EU has used minimum prices for agriculture.