Can You Explain The Concepts Of Maximum And Minimum Price Controls?

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amber Jhon Profile
amber Jhon answered
The concept of maximum or minimum price is known as reservation price or reserve price. Maximum price means that how much money a buyer is willing to pay against a product or a service. On the other hand, the minimum price shows the lowest price which the seller wants to get for his product or service. Reservation price concepts are widely used in auctions. OK, now coming to your questions! Basically it is very important to control the maximum and minimum prices to save the interest of both the buyers and the sellers.

Suppose, there is perfect competition in the market and companies start lowering the prices and a price war is initiated in the market. This price war can cause losses to many sellers who are already selling at the break-even point. Therefore, a minimum price control is very important to save the interest of the sellers. On the other hand, if there is monopoly in the market then the companies can get advantage of the market conditions and can charge as much price as they want, especially for the basic needs like electricity. This situation can make the consumers suffer, therefore, for saving the interest of the consumers a maximum price control is required.

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Anonymous commented
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Don Demarco Profile
Don Demarco answered
Min and max price controls? What exactly do you mean?

Anytime the government or any entity attempts to control pricing, they have an aggregate negative effect.

If you are talking about in a free market society, you use calculus to attempt to determine what your maximum profit margin to be with all economic components considered. For example, if you sell at a certain low price and your profits are x and then you raise your prices and your profits are y, you have to determine what your max profits are.

If you are speaking in the macro, sorry, any price controls screw up the model.

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