Answer to Question #226485 in Microeconomics for Montana

Question

Briefly explain by the means of examples the difference between a minimum price and a maximum price

Answer 1

Solution:

A minimum price also known as the price floor, refers to the lowest possible price that can be legally set by the government, that producers are permitted to charge consumers for the goods or services produced or sold. It is normally set above the equilibrium price in order to have an impact on the market.

A minimum price is usually set up to assist producers or suppliers of essential goods and services such as bread, milk, and wheat. Other examples include most agricultural products and minimum wage.

 

A maximum price also known as price cap or price ceiling refers to a limit or cap on a price set by the government. It is the highest possible price that producers are permitted to charge consumers for their goods and services established by the government. It is normally set below the equilibrium price in order to have an impact.

A maximum price is normally established with the intention of reducing prices below the market equilibrium price to make the products or services affordable to the consumers. Examples include caps on prescription drugs costs, medical tests, energy costs, and rent controls.