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Price Control on Market Structure

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Price Control on Market Structure

Do you think that the government should have the right to create minimums and limits on how much commodities can sell for? What about if it's beneficial for the economy? And what if it's harmful to the economy? The answer is that it's actually both beneficial and harmful, so great care must be taken with whichever path is decided on in terms of price control and market structure. To learn more about price controls, the effects, examples, and more, continue on!

Price Control and Market Structure Overview

When talking about price controls, the conversation is about limits that are imposed and upheld by the government regarding the amounts in a market that can be charged for products and services. Setting such limits may be motivated by a wish to keep commodities affordable even in times of supply disruptions and to prevent inflation, or even just to guarantee a living wage. When talking about price controls in markets, there are two main types that are seen: price ceilings and price floors.

Price controls are limits that are imposed and upheld by the government regarding the amounts in a market that can be charged for products and services.

Price Ceiling

The highest price that a vendor can ask for a service or product is known as the price ceiling. Price ceilings (also known as price caps) are generally implemented during emergencies like environmental disasters or wars. Why? Because these situations frequently result in unexpected price hikes that harm numerous people while benefiting only a select few.

Price Control and Market Structure Price ceiling StudySmarter OriginalsFigure 1. Price ceiling, StudySmarter Originals

In Figure 1 above a price ceiling is set at P2, which keeps the price of commodities down. By doing so the government is attempting to protect buyers from the sellers who are only out to make a profit. However, the downside of this is that there is now a shortage of Q2-Q3 in the market as demand exceeds supply at P2.

Price ceilings are the highest prices that a vendor can ask for services or products. Basically, a price ceiling lowers prices of products and services.

The wartime selling prices that happened during World War II is one example in history of a price ceiling. During this time, the government fixed the cost of numerous commodities, like rubber and paper, below the normal sale price in an attempt to curb inflation and keep prices from increasing too rapidly when there was a shortage of supply and a surplus of demand.

Price ceilings generally result in inefficiency in the shape of wastage of resources: individuals devote wealth, energy, and time to compensate for shortages linked to price ceilings. The inefficiency is also due to the fact that the commodities being supplied are of consistently poor quality: vendors produce poor-quality commodities at a cheap price although consumers would rather pay a higher price to have a high-quality product.

Shortages occur when the demand is greater than the supply of products and services.

Price Floor

The price floor is the absolute minimum cost that consumers must pay for a commodity or service. For example, minimum wage is used as a price floor for the rate of pay that reflects the market price of work. Price floors, similar to price ceilings, are meant to aid individuals but have foreseeable and unfavorable consequences. How? Well, the continuous excess that arises from a price floor generates wasted opportunities that are similar to those created by a price ceiling.

Price Control and Market Structure Price Floor StudySmarter OriginalsFigure 2. Price Floor, StudySmarter Originals

In Figure 2 above a price floor is set at P2, which raises the price of commodities. In the case of wages this would be the minimum wage and would increase the price that workers receive for their labor. By doing so the government is attempting to protect sellers of the goods and services. In case of workers, they are regarded as the sellers of their labor. However, the downside of this is that there is now a surplus of Q2-Q3 in the market as supply exceeds demand at P2.

A price floor is the absolute minimum cost that consumers must pay for a commodity or service. Price floors raise prices of products and services.

Surpluses occur when the supply is greater than the demand of products and services.

Many industrialized nations, like the USA and the EU, put price floors on agricultural goods in order to safeguard farmers. The price floors motivate farmers to expand production while also bringing in new investors to the business.

The Effects of Price Control on Market Structure

Price restrictions are used by governments to guarantee that products and services are offered at a fair price. The free market model works successfully when there are many well-educated buyers buying from various vendors who are able to create a reputation for having excellent or poor-quality commodities. Because of the rivalry between inventors and consumers, this ensures a more fair price. Unfortunately, moments exist where the information (if any) is unavailable to a minimum of one party, or is overall incorrect.

The government then may establish price limits in order to safeguard people from exploitation. Overall, imposing price controls on a well-off, competitive market hurts the community by lowering the volume of business and incentivizing the wastage of resources. Price controls can also impair quality and generate illegal markets as well.

Examples of Price Control

There are many examples of when price controls are used.

Drug costs, for example, are frequently regulated by governments, especially prices for life-saving drugs such as insulin. Drug firms are frequently chastised for having excessively high pricing and they try to get people to accept the high prices while citing costs of research and patents as reasons for the high costs.

Rent control is also a great example. There are numerous types of rent control, however all take the form of legally enforced rental housing costs that are way below the norm. First, there is a scarcity of rental units as landlords grow less willing to rent at such low prices. Instead, the landlords opt to reside in the flats, rent them to family and friends, or sell them to someone else.

This scarcity causes a slew of issues. For instance, because there is a waiting list of individuals who are looking for a property and landlords are not allowed to refuse based on cost, they will instead discriminate based on anything else. They also tend to request extra money from the renters to be given to them under the table before accepting them as tenants and allowing them to sign a rent contract.

Price Control and Market Structure Mechanism

Price controls are a type of legally-enforced economical interference. They are intended to make items more inexpensive for buyers and are frequently used to guide the market structure mechanism in a specific way. These limits may be thought of as necessary in order to control inflation. Price controls are completely contrary to market forces, which decide prices based on supply and demand.

While price controls might well be justified in terms of cost efficiency and stability, they could actually cause the opposite to be true. Over time, price controls have been shown to cause scarcity, rationing, inferior-quality products, and black markets to sell price-controlled commodities through illicit means. In such cases price controls have an adverse effect on the market structure mechanism.

Examples of Market Structures and Price Controls

There are four different market structures:

  • Pure Competition
  • Monopolistic Competition
  • Monopoly
  • Oligopoly

Market structures are how various sectors are categorized and distinguished depending on the extent and nature of rivalry for services and commodities.

Let's take a look at how the effects of price controls differ between them.

Examples of Market Structures and Price Controls: Pure Competition

In a pure competition market, the market forces (meaning supply and demand) dictate the amount of products and services that will be produced, as well as prices established by key market players. The items sold by various businesses are all the same. An example of this would be farm products like corn.

Governments often intervene in agricultural markets in order to reduce volatility of prices that producers of agricultural products receive. This ensures consistent supply of food for the nation and prevents food shortages.

Supply is the amount of goods and services that are available for suppliers to offer buyers.

Demand is the desire of someone to have a certain product or service and being willing to pay for it.

Examples of Market Structures and Price Controls: Monopolistic Competition

Opposite of pure competition, monopolistic competition doesn't really guarantee the lowest potential price of manufacturing. That minor change allows for significant variances in how the firms function within the market. Monopolistic competition companies sell relatively identical items with minor variances that serve as the foundation for their advertising and sales.

Monopolistically competitive markets are often subject to price controls by the government due to negative externalities. Fast food, sugary drinks and cigarettes, for example, would be subject to price controls in order to increase the minimum price that the consumer has to pay in order to reduce consumption of the products that create inefficient social outcomes.

Examples of Market Structures and Price Controls: Monopoly

Monopolies and truly competitive markets are at the opposite corners of the market structure spectrum. But a similarity they have is that both put a focus on promoting profit and reducing costs. In monopoly marketplaces, while ideal competition has numerous rivals, there is only a single supplier. Due to this fact, no competition regarding prices exists.

Monopolies are often subjects of price controls, especially when there is a sole provider in the area in case of utilities, for example. The government needs to ensure that the monopolist does not abuse their position and does not overcharge consumers which could make basic utilities unaffordable for some, thereby exacerbating inequality.

A monopoly is a market where there is only a single supplier that doesn't allow for competition from others.

Examples of Market Structures and Price Controls: Oligopoly

Oligopoly markets have businesses that work collaboratively to reduce competition and control a distinct market or sector. Sizes of these companies can vary. However, the strongest companies frequently are bigger and have patents, money, and resources that they can use to generate obstacles for new companies trying to enter into the market.

Oligopolies are subject of price controls to prevent collusion and anti-competitive behaviour. The governments can limit how much producers can charge on particular products to prevent oligopolists from getting unfair advantage due to collusion.

An oligopoly is a market where only a handful of firms control the market.


Price Control and Market Structure - Key takeaways

  • Price controls are limits that are imposed and upheld by the government regarding the amounts in a market that can be charged for products and services.
  • Price ceilings are the highest prices that a vendor can ask for services or products. Basically, a price ceiling lowers prices of products and services.
  • A price floor is the absolute minimum cost that consumers must pay for a commodity or service. Price floors raise prices of products and services.
  • Price restrictions are used by governments to guarantee that products and services are offered at a fair price.
  • Price controls are completely contrary to market forces, which decide prices based on supply and demand.

Frequently Asked Questions about Price Control on Market Structure

Price controls are limits that are imposed and upheld by the government regarding the amounts in a market that can be charged for products and services.


Market structures are how various sectors are categorized and distinguished depending on the extent and nature of rivalry for services and commodities.

Price ceiling; Pure competition

Price controls have been shown to cause scarcity, rationing, inferior-quality products, and black markets to sell price-controlled commodities through illicit means.

Price controls are completely contrary to market forces, which decide prices based on supply and demand.

Pro: price limits are set in order to safeguard people from exploitation.

Con: price controls can impair quality and generate illegal markets.

Final Price Control on Market Structure Quiz

Question

What is price control?

Show answer

Answer

A limit that is imposed and upheld by the government regarding the amount in a market that can be charged for products and services.

Show question

Question

Define market structures.

Show answer

Answer

Market structures are how various sectors are categorized and distinguished depending on the extent and nature of rivalry for services and commodities.

Show question

Question

Define price ceiling


Show answer

Answer

Price ceilings are the highest prices that a vendor can ask for services or products. Basically, a price ceiling lowers prices of products and services.

Show question

Question

Price ceilings generally result in inefficiency in the shape of wastage of ________.

Show answer

Answer

resources 

Show question

Question

Price restrictions are used by governments to guarantee that products and services are offered at a fair price.

Show answer

Answer

True

Show question

Question

Price controls can impair _____ and generate illegal markets as well.

Show answer

Answer

quality

Show question

Question

Which of these is an example of a price ceiling?

Show answer

Answer

Rent control

Show question

Question

What are the four different market structures?


Show answer

Answer

Pure competition, monopolistic competition, monopoly, oligopoly 

Show question

Question

What's an oligopoly?

Show answer

Answer

An oligopoly is a market where only a handful of firms control the market.

Show question

Question

Price ceilings (also known as price caps) are generally implemented during ________ like environmental disasters or wars.

Show answer

Answer

emergencies

Show question

Question

Why are there price ceilings during times of emergency?

Show answer

Answer

Because these situations frequently result in unexpected price hikes that harm numerous people while benefiting only a select few.

Show question

Question

In a pure competition market, the market forces (meaning ____ and _____) dictate the amount of products and services that will be produced.

Show answer

Answer

supply, demand

Show question

Question

Why don't consumers favor one vendors commodities over another vendors commodities in a pure competition market structure?

Show answer

Answer

The items sold by various businesses are all the same. This means that consumers have no reason to favor one over the other.

Show question

Question

In monopoly marketplaces, while ideal competition has numerous rivals, there is only a single ______.

Show answer

Answer

supplier

Show question

Question

Price controls are a type of legally-enforced economical interference.

Show answer

Answer

True

Show question

Question

Setting price limits may be motivated by a wish to keep commodities affordable even in times of supply disruptions and to prevent inflation, or even just to guarantee a living wage.

Show answer

Answer

True 

Show question

Question

Why are price ceilings generally implemented during emergencies like environmental disasters or wars?

Show answer

Answer

Because these situations frequently result in unexpected price hikes that harm numerous people while benefiting only a select few. 

Show question

Question

By keeping the price of commodities down,  the government is attempting to protect buyers from the sellers who are only out to make a profit.

Show answer

Answer

True

Show question

Question

The wartime selling prices that happened during World War II is one example in history of a price ___.

Show answer

Answer

ceiling

Show question

Question

Price ceilings generally result in inefficiency.

Show answer

Answer

True

Show question

Question

Individuals devote money, energy, and time to compensate for ______ linked to price ceilings.

Show answer

Answer

shortages 

Show question

Question

In regards to price _____, 

vendors produce poor-quality commodities at a cheap price although consumers would rather pay a higher price to have a high-quality product.


Show answer

Answer

ceilings

Show question

Question

Minimum wage is used as a price floor for the rate of pay that reflects the market price of work.

Show answer

Answer

True 

Show question

Question

How are price floors disadvantageous?

Show answer

Answer

Because the continuous excess that arises from a price floor generates wasted opportunities that are similar to those created by a price ceiling.

Show question

Question

What is the goal of price floors as they relate to minimum wage?

Show answer

Answer

The government is attempting to protect sellers of the goods and services.

Show question

Question

In case of workers, they are regarded as the _____ of their labor.

Show answer

Answer

sellers

Show question

Question

Price _____ are used by governments to guarantee that products and services are offered at a fair price

Show answer

Answer

restrictions

Show question

Question

Because of the ____ between inventors and consumers, this ensures a more fair price.

Show answer

Answer

 rivalry

Show question

Question

The ___ ____model works successfully when there are many well-educated buyers buying from various vendors who are able to create a reputation for having excellent or poor-quality commodities.

Show answer

Answer

 free market

Show question

Question

Price controls can also impair quality and generate ____ _____.

Show answer

Answer

illegal markets

Show question

Question

Drug firms are frequently chastised for having excessively high pricing and they try to get people to accept the high prices while citing costs of research and patents as reasons for the high costs.

Show answer

Answer

True 

Show question

Question

Price controls are a type of legally-enforced economical interference.

Show answer

Answer

True  

Show question

Question

____ ______ are intended to make items more inexpensive for buyers and are frequently used to guide the market structure mechanism in a specific way.

Show answer

Answer

Price controls

Show question

Question

Price controls are completely contrary to market forces, which decide prices based on ______ and ______.

Show answer

Answer

supply; demand

Show question

Question

Over time, price controls have been shown to cause ____, rationing, inferior-quality products, and black markets to sell price-controlled commodities through illicit means.

Show answer

Answer

scarcity

Show question

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