b) Suggest how the use of price controls could be used to regulate agricultural markets

sellers can sell for the good or service. Sellers are prohibited from selling above the stipulated price but prices can fall below it. A price ceiling is set below the existing equilibrium; by doing so, the government protects consumers in cases of supply shocks and expected price hikes.

From the diagram, consumers pay p1 before a max price and derive consumer surplus of a+b. With max price, they now pay lower price at Pmax; improving equity in the market. Welfare increases to a+c.

Nevertheless, there is a resultant excess demand which results in a shortage. As seen, Qd>Qs and there is a resultant shortage, which might perpetuate the growth of an illegal or informal market. There is also a drop in producer surplus to area e. Because the society now consumes at Qs, there is an under-allocation and a resultant welfare loss b+d. Governments may have to increase supply of agricultural products either using subsidy or buffer stock from previous purchase. Effectively, this maximum price does not wPrice controls are defined as government-mandated maximum or minimum price that can be charged for specified goods, which are known as price ceiling or price floor respectively.

1a) P1: define maximum price as a legally established price ceiling that is set below the existing equilibrium. prices are allowed to fall below but not above this price. this prevents prices of food from going too high.


p2: explain how a maximum price works.

it reduces the equilibrium price from Pe to Pmax, there is a reduction of prices below equilibrium

at the new price, there is a change in Qd and Qs, Qd increases, and Qs decreases, the output falls to Qs, there is a resultant shortage of food.


p3: illustrate using diagram

explain that the effect on output depends on relative elasticity of demand and supply

it also depends on government intervention to increase the supply of food through subsidies or releasing buffer stock

Price ceiling is defined as a legally established maximum price that work in the long run as producers might also leave this market since the revenue they can earn is greatly reduced.


Maximum price diagram

Maximum price diagram


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