1) Maximum Price or price ceiling

Maximum price refers to the limit on the price charged for a product. Maximum price, also known as
price ceiling, is set by government below the market price, as illustrated. When government imposes
a maximum price, or price ceiling at Rm 2, which is below the market equilibrium price of RM 5, the
quantity demanded is 110 units of good Y while the quantity supplied is only 50 units.
The government imposes a price ceiling to protect customers from circumstances that could
make the necessary goods uttainnable. The objective of a maximum price is to protect consumer’s
interests. This kind of policy, in most cases is used to curb of the cost of essential goods and
commodities such as food medicines and so on.

The equilibrium price is Pe. A maximum price leads to demand of QD, but a fall in supply to QS.

Advantages
1. Help prevent suppliers from engaging in price gouging, or charging outrageously high prices
for limited goods

2. Keeping the cost of living affordable during periods of high inflation

Consequences
1.Shortage-Suppliers are no longer eligible to charge as they did before so some suppliers will frop
out of the market. Consumers find they can nnow buy the product at a lower price, so quantity
demanded will increase.

2.Black market.
-If consumers are unable to obtain the needed goods because a price ceiling reduces the quantity
they may turn to the black market. The black market price is hiher than the free market because the
quantity is less than in afree market transaction, where more sellers could afford to sell the product.

3.Reduce the quantity produce.

-The imposition of maximum price will reduce the quantity produced of an already scarce
commodity.
2) Minimum Price or price floor

Minimum price refers to the limit set on the price charged for a product. Minimum price is also
known as price floor, which is set by government above the market price, as illustrated.The
government imposes a price floor to protect producers. It ensures taht prices stay high so taht
production can be continued.

The equilibrium price is Pe. A minimum price leads to increase in supply to QS, but fall in demand to
QD.

Consequences
1. Surplus
-COnsumers find they mst pay a higher price for the same product. As a result, they reduce their
purchases or drop out of the market. The suppliers have a higher price than they weere charging
before. They will increase production. This situation will result in supply exceeding demand, which
causes a surplus.

2. To protect producers income

-Imposition of a minimum price protects the producers incomes, for example, agriculture producers
usually or always face an uncertain climate for the production of agriculture goods. Minimum price
would ensure taht producers incomes wil be protected.

3. Consumers need to pay more to get a product

-Consequently, it is nit fair to consumers because they need to pay more for the same products.