Question

Consider the effects of the following policy actions. To illustrate their effects identify real world policy situations in which they are used.

1.Setting a maximum quantity produced or employed (available for employment)

2.Setting a minimum price for the product or service

Answer 1

1) Setting a maximum quantity produced or employed is a restriction on quantity . In such a case if demand is more then price will be higher than equilibrium and if supply is more than restricted quantity and demand is lesser then price will be low . This is done in case of manufacturing harmful goods such as cigarettes . A restriction on supply of cigarettes can raise price of cigarettes reducing consumption .

2) Minimum price for a product is called price floor . The price is not allowed to fall beyond the floor . The floor should be place above equilibrium price for it to be effective . This is done when the equilibrium price is too low . This is usually done in case of labor market where the wage is set above equilibrium to prevent exploitation of workers by very low market wage . Also in agricultural market , so that the farmers get a higher price for the goods produced . This setting of a minimum price or price floor causes the quantiy supplied to be higher than demanded . So there will be a surplus in the market .