03/12/22, 11:37 Calculating price controls (HL) | IBDP Economics HL FE2022 | Kognity

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Overview
2.7 Role of government in microeconomics
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At this point, you are ready to calculate the effects of price controls, using
 everything you have learned so far in this subtopic.
Table of
contents

 Price ceilings
Notebook
Calculations related to the price ceiling issue are a repetition of what you have

learned to do in previous sections, but applied to this specific case. You should
Glossary

be able to calculate possible effects from the price ceiling diagram, including

Reading
the resulting shortage and the change in consumer expenditure (which is equal
assistance
to the change in firm revenue).

Figure 1 shows the market for bread where the government has set a
maximum price control of $1 per kilogram of bread to make it more affordable
to low-income consumers and consequently increasing consumption of it.

Use this diagram to answer the questions below.

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Overview
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Figure 1. Maximum price imposed on the market for bread.

Worked example 1

Based on Figure 1, answer the following questions.

1) Calculate the change in producers’/suppliers’ revenue after the maximum price

is set.

2) Calculate the shortage generated by the price ceiling.

Price floors
With respect to price floors, you should be able to calculate the possible
effects from the price floor diagram, including the resulting surplus, the
change in consumer expenditure, the change in producer revenue and the
government expenditure to purchase the surplus.

Figure 2 shows the market for milk where the government has set a minimum
price control of $3 per litre of milk to ensure revenue for milk producers. The
government considers milk to be a fundamental component of the population's
diet, and it wants to secure the jobs of thousands of workers who are employed
in the dairy industry.
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03/12/22, 11:37 Calculating price controls (HL) | IBDP Economics HL FE2022 | Kognity

 Use this diagram to answer the questions below.

Overview
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Figure 2. Minimum price set on the milk market.

Worked example 2

Based on Figure 2, answer the following questions.

1) Calculate the change in firms' revenue after the minimum price is set, assuming
that they sell all of their supply at that price.

2) Calculate the change in consumers' expenditure after the minimum price is

imposed.

3) Calculate the surplus (excess supply) generated by the price floor.

4) Calculate the government's expenditure to purchase the surplus (excess

supply).

 Be aware
Notice that in this last example, although the quantity demanded of
milk has fallen because of the increase in price, consumers' total
expenditure has increased because the demand for milk is inelastic.

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Therefore, an increase in price will produce a smaller than
Overview
proportional fall in the quantity demanded.
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