Costs can also rise due to inflation.
If the maximum price is set above the equilibrium price then it will have no effect. If the maximum price is set below the equilibrium price, it will cause a shortage — demand will be greater than supply. Diagram of maximum price In this diagram, the max price causes excess demand of Q2-Q1.
Reasons for maximum prices Maximum prices involve the government making a normative judgement that the market clearing price is too high, and needs to be reduced.
The government may impose a maximum price for a variety of reasons. The good is essential for daily living — without a maximum price, some people may be unable to afford the good. By reducing the price, it can help reduce relative poverty.
If firms have monopoly power, they can charge high prices to consumers — higher than the marginal cost of production and higher than in a competitive market. If supply is very inelastic, then a maximum price will not reduce the supply of the good, therefore, there will be no fall in the quantity supplied.
If rents were very high, it may cause investors to concentrate on building new houses and ignoring other aspects of the economy. However, an excess of house-building could contribute to a bubble in home-building — which leaves the market vulnerable to a correction in prices.
For example, housing bubbles in Ireland and Florida pre credit crisis. A maximum price limits the resources flowing to houses and enables a more balanced economy. Examples of maximum prices Maximum prices for train tickets. With monopoly power, train companies could increase the peak tickets, but governments may impose a maximum price or maximum price increase on firms to keep tickets affordable — even if it leads to over-crowding.
Maximum price for rent. Governments have tried different types of rent control — keeping the cost of renting below a certain level. Maximum price for food.
In some developing economies, there are maximum prices for certain foodstuffs to keep them affordable. Problems of maximum prices Shortage. A maximum price distorts the market and leads to disequilibrium.
The demand is greater than supply meaning many consumers will be unable to get the product at all.
Cheap rents are no good if it leaves many people homeless. People could buy the good at the low maximum price and then resell to those customers who were unable to buy. This is potentially quite lucrative as some of those customers who missed out may be willing to pay a very high price.
One consequence of a maximum price is that people will end up queuing to try and get the good before it sells out.increase in profits, assuming that the maximum price increase is implemented.
c. If the volume of sales were to remain at 60, units, what price increase would be required to. Maximum prices – definition, diagrams and examples Definition – A maximum price occurs when a government sets a legal limit on the price of a good or service – with the aim of reducing prices below the market equilibrium price.
Cost-of-Living Increases General.
The cost-of-living increase is percent for monthly benefits under title II and for monthly payments under title XVI of the Act. Under title II, OASDI benefits will increase by percent for individuals eligible for December benefits, payable in January May 14, · How to Calculate Cost Increase Percentage.
To calculate cost increase percentage, subtract the item’s 70%(18). The profit-maximizing output is the one at which this difference reaches its maximum.
Changes in total costs and profit maximization An increase in fixed cost would cause the total cost curve to shift up rigidly by the amount of the change.
Price Increase Sample Clauses Price Increase. In the event AMD sells a Combined Product to a Customer or Channel Partner in an amount that is in excess of the RSP at the time the order was booked for such Product, the Purchase Price shall be automatically increased to an amount equal to the applicable percentage (as set forth in Section above) of the actual sales price of such Product.