Which one of the following market outcomes is most likely after a government places a maximum price cap on basic bread below the equilibrium price? Fig. 1 s...
Question 1 Report
Which one of the following market outcomes is most likely after a government places a maximum price cap on basic bread below the equilibrium price? Fig. 1 shows the original bread market. The cap is intended to help low-income households, but bakery firms report that flour, energy and labour costs are rising. At the capped price, consumers can buy bread more cheaply if it is available. Use the figure to consider the quantities demanded and supplied at a low price.
(a) Identify the feature of Fig. 1 which makes the price cap binding. [1]
(b) What is the likely market outcome at the price cap? [1]
(c) Explain two possible effects of this outcome on consumers or bakery firms. [3]
(d) Which government action could reduce the shortage without removing the price cap? [2]
Answer Details
(a) The price cap is binding because it is set below the equilibrium price. [1]
(b) The likely outcome is excess demand, also called a shortage. [1]
(c) At the low capped price, quantity demanded exceeds quantity supplied. [3] Consumers may queue, some may be unable to buy bread, or rationing may be used. Bakery firms may supply less because the permitted price is lower, and unofficial resale may develop.
(d) The government could subsidise bread firms or otherwise reduce their production costs. [2] This increases supply and reduces the shortage while the cap remains.
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