Economics 3 Marks Question

A price ceiling occurs when the government limits how much producers can charge for a good. It is called a ceiling because you cannot charge more than the amount specified by the government. This is set by the government to protect the interest of the seller.
Price floor is set above the equilibrium price which creates ‘excess supply’ in the market as shown in the diagram given below.

In the above diagram, OP is equilibrium price because at this price demand is equal to supply. Further OP is the price floor which creates excess supply equal to ab. Implications of minimum price ceiling:
i. It assures the farmers that whatever they produce will get sold in the market.
ii. It secures higher income for producers and labours (i.e. labour laws are an example of price floor).
iii. The end result is high prices for consumers.

The production possibility frontier (PPF) is a curve depicting all maximum output possibilities for two goods, given a set of inputs consisting of resources and other factors. The PPF assumes that all inputs are used efficiently.
The four key assumptions underlying production possibilities analysis are:
1. resources are used to produce one or both of only two goods,
2. the quantities of the resources do not change,
3. technology and production techniques do not change, and
4. resources are used in a technically efficient way.

An individual himself is not capable of producing all goods and services which he needs for the satisfaction of wants. He depends upon others. If you are a teacher, students depend upon you for their education. You, on the other hand, depend upon a baker for the bread, a tailor for stitching your clothes, a maidservant for domestic help, and so on. Thus, mutual interdependence is the essence of economic activity. Mutual interdependence leads to exchange. Accordingly, we can say that mutual interdependence and exchange are the core elements of an economy.
A simple economy is the one in which the degree of ‘interdependence and exchange' is of a moderate degree. Every individual in the community is occupied in the manufacturing of some goods or services and they require an amalgam of many goods and services not all of which are produced by them.