Economics Assignment: Price Ceiling, Price Floor, and Monopoly Market

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ECONOMICS ASSIGNMENT

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Contents
Question 1..................................................................................................................................3
(a)...............................................................................................................................................3
(b)...............................................................................................................................................5
(c)...............................................................................................................................................7
Question 2..................................................................................................................................9
(a)...............................................................................................................................................9
(b).............................................................................................................................................10
(c).............................................................................................................................................13
Question 3................................................................................................................................13
Reference..................................................................................................................................16

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Question 1
(a)
The parliament of Kenya thinks that the price for the maize is very high and therefore it
wants the government to regulate the sector by setting a maximum price in the market. This
will allow the small income group of the market to afford the maize. Therefore, in terms of
economics, it is talking about a price ceiling above which the price of maize will not be able
to go (Kreps, 2019). To understand the impact of the maximum price in the market of maize,
the concept of binding and the non-binding price floor needs to be understood. In this case,
the price is higher according to the parliament, therefore, if the government imposes the
ceiling above the market price it will come down to the equilibrium price and hence it would
be a non-binding price ceiling with no impact on the market. Therefore, the government will
impose a non-binding price ceiling below the equilibrium price level of maize.
Figure 1: the impacts of the maximum price
(Source: Iossa and Martimort, 2015)
Therefore, the case particular to this case is shown in the above figure. In this case, the
government will put the maximum price ceiling below the equilibrium price so that
affordability increases. Consequently, the market price for the maize comes down from Pe to

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Pc. At this lower price, the sellers of the market would supply less quantity of maize.
Simultaneously, seeing this low price for maize, more and more customers of the market
would be willing to buy maize and hence the demand for maize would increase. In this case,
the demand for maize will increase due to the change in the price and not any external factors
(Pindyck and Rubinfeld, 2015). Thus, the change of demand will be along the demand curve
for maize. Consequently, there will be excess demand in the market and hence all the
customers of the market will not be able to buy maize at a low price.
Figure 2: the impacts of the price ceiling on society
(Source: Martimort et al. 2015 )
The maximum price ceiling below the equilibrium price for maize in the market will also
have some impacts on society as a whole as well. (Karl et al. 2019) stated that, impacts of
any economic policy on the society is measured examining the changes in the social welfare
or the changes in the consumers’ and producers’ surplus. In this case, the price ceiling below
the equilibrium price would result in a low price level and low quantity sold in the market.
Therefore, the producers’ surplus which is the area between the price and supply curve, will
reduce to a triangle shown in purple colour. On the other hand, the surplus of the consumers'
which is the area above the price and below the demand curve, will increase to a shape