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Quantity controls

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Quantity controls

Picture the covid-19 lockdown is in full force; you visit the supermarket to buy supplies to fill up your kitchen shelves at home, except you can't because you're only allowed to buy one of each item. You just wanted some cheese that'll last you through the lockdown, and there are lots of it on the supermarket shelves. Meanwhile, you look at the toilet paper section, and it's all completely gone. So why are they giving your cheese quantity controls?

This means the supermarket has put a quota or quantity control on the items you want. While this scenario is a simplified version of quantity controls, the government uses quantity controls as a type of intervention to achieve specific outcomes. This is why we're here; to discuss quantity controls and its methods. Read on; it's fun!

Quantity Controls Definition

First things first - quantity control limits the quantity of a product that can be bought or sold. It's an upper limit, so basically, the government makes sure that producers do not sell past a set quantity of a specific good. Or, the government makes sure that consumers do not buy past a set quantity of a specific good. Economists may also refer to quantity control as a quota.

Quantity control is a government intervention limiting the quantity of a product that can be bought or sold.

Let's look at an example.

Let's consider a country where the government issues a special license for coffee producers. At any point in time, the government issues 500 licenses, meaning there cannot be more than 500 coffee producers in the country. Without a license, other firms cannot produce coffee in the country.

In the above example, the government has placed quantity control on coffee production. Therefore, even though other firms may want to produce coffee, all the firms have to compete for the 500 licenses being issued. What would happen to the price of these permits if more than 500 want to produce coffee? If you guessed, that there would be a price increase, you'd be right! The government may use quantity controls to help the producers of a particular good through the resulting price increase.

The Inefficiency of Quantity Controls

The government may introduce quantity controls for good or bad reasons. For instance, producers of coffee may be genuinely struggling, and introducing quantity control on coffee may help them by increasing the coffee price. However, a (corrupt) government could also introduce a quantity control on coffee just to help some friends make a large profit! Usually, quantity controls lead to inefficiency. How? Let's explain!

Look at the example below.

Let's consider a country where the quantity of coffee bags produced yearly is limited to 800,000.

First, we will look at the coffee bag market without quantity controls. This will help us see how the market should act under normal circumstances. The market for coffee bags without quantity controls is illustrated in Table 1 and Figure 1.

Price per coffee bag ($)Quantity Demanded (hundred thousand)Quantity Supplied (hundred thousand)
6.5715
6.0814
5.5913
5.01012
4.51111
4.01210
3.5139
3.0148
2.5157

Table 1. Demand Schedule for Coffee Bags

If the price is too low or too high, there will be a mismatch resulting in a shortage or surplus, which reduces the overall efficiency of the market. At the equilibrium price ($4.5), the efficiency of the market is maximized.

Below is a graphical representation of the demand schedule in table 1.

Quantity Controls, Coffee bag market without quantity control, StudySmarterFig 1. - Coffee bag market without quantity control, StudySmarter Originals

Table 1 and Figure 1 show that the market reaches equilibrium at a quantity of 1.1 million coffee bags. At this quantity, the price of a coffee bag is $4.5. This is the price at which consumers want to buy a coffee bag. Economists refer to this as the demand price.

The demand price of a quantity of a good is the price at which consumers are willing to purchase that quantity of the good.

The same goes for the supply side of things. Since the producers are willing to supply 1.1 million bags of coffee at a price of $4.5, this is the supply price.

The supply price of a quantity of a good is the price at which producers are willing to supply that quantity of the good.

Equilibrium is the best outcome for the market, until the government's quantity control of 800,000 bags of coffee kicks in. Let's look at Table 2 and Figure 2.

Price per coffee bag ($)Quantity Demanded (hundred thousand)Quantity Supplied (hundred thousand)
6.5715
6.0814
5.5913
5.01012
4.51111
4.01210
3.5139
3.0148
2.5157

Table 2. Demand Schedule for Coffee Bags

In table 2 above we can see that the demand price for 800,000 bags is $6, even though the supply price is $3. This is displayed graphically below.

Quantity Controls, Coffee bag market with quantity control, StudySmarterFigure 2. Coffee bag market with quantity control, StudySmarter Originals

Looking at Table 2 and Figure 2, we see that consumers are willing to buy 800,000 bags of coffee for $6 per bag, whereas the producers are willing to sell 800,000 bags of coffee for $3 per bag. In Figure 2, consumers must be at point A, while producers must be at point B. This situation is forced by quantity control.

This creates inefficiency because there are missed opportunities. Missed opportunities here mean that the business could have continued supplying from 800,000 to 1.1 million bags of coffee, where equilibrium would have been achieved (Table 1 and Figure 1). By stopping things at 800,000 bags of coffee, the government has caused the market to miss these opportunities. These missed opportunities are referred to by economists as deadweight loss, as shown in Figure 2.

As you can see, the quantities match, but the demand price does not match the supply price.

A deadweight loss occurs when the demand price exceeds the supply price.

The main relationship between price and quantity controls is that quantity controls often create a situation where the demand price exceeds the supply price. This leads to missed opportunities or deadweight loss since the producers would have had the opportunity to sell their product at a higher quantity and the consumers would have had the opportunity to buy the product at a lower price. Ideally, we want the demand price to equal the supply price at the same quantity.

Price and Quantity Controls

Markets can be controlled with price and quantity controls. So, what are they? While quantity controls limit the quantity of a good that can be bought or sold, price controls limit the price a good can be bought or sold for.

The government uses price controls to limit the price a good can be bought or sold for.

There are two main types of price controls, and these are price ceilings and price floors. The price ceiling puts an upper limit on the price of a good, and this means producers cannot sell above that price. The price floor does the opposite; it puts a lower limit on the price of a good, so producers cannot sell below that price.

Check out our articles on Price Ceilings and Price Floors for some interesting details!

Interestingly, price controls can indirectly affect the quantity, as producers may produce less of a good if they are not allowed to charge above a certain price. Quantity controls also affect price indirectly, since producers may increase the price if they realize there is high demand but limited supply.

Now, let's look at some methods of quantity control.

Quantity Controls Methods

The main objective of quantity controls is to limit the quantity of a good bought or sold. Therefore, the government may do this by providing a limited number of licenses to produce a specific good. Some methods include the following:

  1. Licensing

  2. Production quotas

  3. Import quotas

For licensing, the government provides a limited number of licenses to operate a given business.

The government sees that taxis may overcrowd the cities if left uncontrolled, so they limit the number of taxi licenses they provide to 500 per city.

This will cause a scarcity of taxi licenses, which then means the government can charge a higher price to issue such licenses. It may also limit the taxi drivers' ability to satisfy demand.

Next, a quota can be placed on the quantity of a good each firm can produce each year.

The government does not like the idea of alcohol and cigarettes being so easy to buy, since they are not exactly healthy habits. The government then limits the quantity of alcohol and cigarettes producers can produce each year.

This will result in a limited supply of alcohol and cigarettes, and producers will raise prices, making it more expensive to buy these products.

The government may also limit the quantity of a good that can be exported or imported. A common place for quotas is the import of foreign vehicles.

American car manufacturers feel they are unfairly struggling against cheap imported cars, so they lobby the government for a quota. This quota sets a maximum quantity of imported foreign vehicles.

This causes the supply to decrease for foreign cars, which can actually increase the price for them as well. Now with less competition in quantity and higher prices, American auto manufacturers will experience growth.

Examples of Quantity Controls

Let's look at an example of quantity control.

A pack of cigarettes initially cost $6, consumers were willing to buy 100,000 packs, and producers were willing to supply 100,000 packs at equilibrium. The government wants to control the consumption of cigarettes, so it puts a quota of 50,000 on cigarettes. This quota results in a supply price of $3 and a demand price of $9.

Since the demand price does not match the supply price in the example above, there is a market inefficiency as a result of the quota. There is a deadweight loss because the producers could have sold 50,000 more packs for $6 and made a lot more money. And the consumers could have bought a pack for $6, which is $3 cheaper.

Congrats! You finished the article! You should read our article on Price Control if you're looking for another interesting read!

Quantity Controls - Key takeaways

  • Quantity control is a government intervention limiting the quantity of a product that can be bought or sold.
  • The demand price of a quantity of a good is the price at which consumers are willing to purchase that quantity of the good.
  • The supply price of a quantity of a good is the price at which producers are willing to supply that quantity of the good.
  • A deadweight loss occurs when the demand price exceeds the supply price.
  • Governments introduce quantity controls by limiting production, exports, and imports or providing a limited number of licenses for producing a specific good.

Frequently Asked Questions about Quantity controls

A quantity control is a government intervention that limits the quantity of a product that can be bought or sold. 

A price control is an upper or lower limit placed on the price of a good by the government.

A quantity control is a government intervention that limits the quantity of a product that can be bought or sold. 

Vessel quantity limits aimed at controlling overfishing.

Quantity controls usually create market inefficiency.

A quantity control is a government intervention that limits the quantity of a product that can be bought or sold. 

Final Quantity controls Quiz

Question

What is a quantity control?

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Answer

A quantity control is a government intervention that limits the quantity of a product that can be bought or sold.

Show question

Question

What is demand price?

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Answer

The demand price of a quantity of a good is the price at which consumers are willing to purchase that quantity of the good.

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What is supply price?

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Answer

The supply price of a quantity of a good is the price at which producers are willing to supply that quantity of the good.

Show question

Question

What is deadweight loss?

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Answer

A deadweight loss occurs when the demand price exceeds the supply price.

Show question

Question

Missed opportunities are what economists call deadweight loss.

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Answer

True

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Question

Quantity controls usually lead to market efficiency.

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Answer

False

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Question

The demand price is often equal to the supply price when quantity controls are introduced.

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Answer

False

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Ideally, economists want the supply price to be equal to the demand price.

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Answer

True

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A quantity control is usually a lower limit on quantity.

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False

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Quantity controls can be in the form of licensing.

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Answer

True

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Before quantity controls are introduced, the supply price equals the demand price at equilibrium.

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Answer

True

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Quantity controls can be introduced with the intention of helping the market.

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Answer

True

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Question

A quantity control only makes sure that consumers cannot buy over the limit. However, producers can sell any quantity.

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Answer

False

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Question

A limit on exports and imports is a method of quantity control.

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True

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Question

A quota is not the same as a quantity control.

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Answer

False

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A risk of implementing quantity controls is...

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Answer

Inefficiency

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Without quantity controls, what happens if the price of goods supplied is too high?

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Answer

There is a surplus.

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Without quantity controls, what happens if the price of goods supplied is too low?

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Answer

There is a shortage.

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Question

A ________ is ___________ that prevents goods from being sold at a lower price.

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Answer

Price floor, lower limit

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What is not an option that the government has for limiting the quantity of a good on the market?

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Answer

Product standards.

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Why do quotas result in market inefficiency?

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Answer

They prevent demand and supply prices from matching to reach equilibrium.

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What is a benefit of quantity control?

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Answer

It can control the amount of a negative burden on society. If too many cars are creating congestion, then the government can limit the number of license plates that can be registered.

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__________ is a negative effect of quantity controls.

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Answer

Scarcity

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How can price controls have a similar effect to quantity controls?

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Answer

Producers may produce less of a good if they are not allowed to charge above a certain price.

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Question

If consumers are willing to buy 17 bags of flour at $3.50 per unit but it costs suppliers $1.25 to produce each unit, the market is experiencing...

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Answer

Market inefficiency.

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Question

Can a fishing license be a quota?

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Answer

Yes, if the government limits how many licenses can be distributed.

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What can governments do to help domestic producers?

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Answer

They can set import quotas.

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How might quantity controls affect prices?

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Answer

Producers may increase the price if they realize there is high demand but limited supply.

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Why is deadweight loss a missed opportunity?

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Answer

Because producers would have had the opportunity to sell more of their products and the consumers would have had the opportunity to buy at a cheaper price.

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