Cambridge Notes, Past Papers, Revision Questions

Cambridge IGCSE Economics 0455 – Allocation of Resources: Mixed Economic System

Topic: The Allocation of Resources – Mixed Economic System

Learning Objective

Students will be able to:

Define key terms related to mixed economies and price controls.

Draw and interpret supply‑and‑demand diagrams showing maximum (price ceiling) and minimum (price floor) prices.

Analyse the advantages and disadvantages of maximum and minimum prices in product markets.

1. Definitions

Term	Definition
Mixed Economic System	An economic system that combines elements of both market (private) and command (government) economies, allowing private ownership and profit motive while the government intervenes to correct market failures, provide public goods, and achieve social objectives.
Maximum Price (Price Ceiling)	A legally imposed upper limit on the price that can be charged for a good or service, set below the market equilibrium price.
Minimum Price (Price Floor)	A legally imposed lower limit on the price that can be charged for a good or service, set above the market equilibrium price.
Consumer Surplus	The difference between the maximum price a consumer is willing to pay and the price actually paid.
Producer Surplus	The difference between the price received by producers and the minimum price they are willing to accept.
Dead‑weight Loss	The loss of total surplus that occurs when market equilibrium is not achieved.

2. Drawing the Diagrams

Draw a standard supply‑and‑demand diagram with price on the vertical axis and quantity on the horizontal axis.

Label the upward‑sloping supply curve S and the downward‑sloping demand curve D.

Mark the equilibrium point E where S meets D. Indicate equilibrium price Pₑ and equilibrium quantity Qₑ.

For a maximum price:
- Draw a horizontal line at the imposed ceiling price Pₘₐₓ below Pₑ.
- Show the quantity supplied (Qₛ) at Pₘₐₓ where the supply curve intersects the ceiling line.
- Show the quantity demanded (Q_d) at Pₘₐₓ where the demand curve intersects the ceiling line.
- Shade the shortage area (the gap between Q_d and Qₛ).

For a minimum price:
- Draw a horizontal line at the imposed floor price Pₘᵢₙ above Pₑ.
- Identify the quantity supplied (Qₛ) at Pₘᵢₙ (intersection with supply).
- Identify the quantity demanded (Q_d) at Pₘᵢₙ (intersection with demand).
- Shade the surplus area (the gap between Qₛ and Q_d).

Suggested diagram: Supply‑and‑demand graph showing (a) price ceiling below equilibrium, (b) price floor above equilibrium, with labelled surplus/shortage and dead‑weight loss.

3. Interpretation of the Diagrams

Use the following points when analysing each diagram:

Maximum price (price ceiling)
- Because Pₘₐₓ < Pₑ, the quantity demanded exceeds the quantity supplied → shortage.
- Consumer surplus may increase for those who obtain the good at the lower price, but overall total surplus falls.
- The area of dead‑weight loss is the triangle between the supply and demand curves from Qₛ to Qₑ.
- Potential non‑price rationing mechanisms (queues, discrimination, black markets) may arise.

Minimum price (price floor)
- Because Pₘᵢₙ > Pₑ, the quantity supplied exceeds the quantity demanded → surplus.
- Producer surplus may rise for sellers who can sell at the higher price, but many producers are left with unsold stock.
- Dead‑weight loss is the triangle between the supply and demand curves from Qₑ to Q_d.
- Government may need to purchase the surplus, store it, or subsidise alternative uses.

4. Advantages and Disadvantages of Price Controls in a Mixed Economy

4.1 Maximum Prices (Price Ceilings)

Advantages	Disadvantages
Helps protect low‑income consumers from excessively high prices (e.g., essential food items, housing). Can reduce inflationary pressure on specific goods. Politically popular; demonstrates government concern for welfare.	Creates shortages; not all consumers who want the good can obtain it. May lead to black markets where the good is sold at higher illegal prices. Quality may deteriorate as producers cut costs to stay profitable. Administrative costs of monitoring and enforcement.

Advantages

Disadvantages

Helps protect low‑income consumers from excessively high prices (e.g., essential food items, housing).

Can reduce inflationary pressure on specific goods.

Politically popular; demonstrates government concern for welfare.

Creates shortages; not all consumers who want the good can obtain it.

May lead to black markets where the good is sold at higher illegal prices.

Quality may deteriorate as producers cut costs to stay profitable.

Administrative costs of monitoring and enforcement.

4.2 Minimum Prices (Price Floors)

Advantages	Disadvantages
Protects producers’ incomes (e.g., agricultural price supports, minimum wage). Encourages investment in sectors deemed socially important. Can reduce poverty among workers if the floor is set as a living wage.	Creates surpluses; excess output may need to be stored, destroyed, or subsidised. Higher prices for consumers, reducing consumer surplus. Potential for inefficiency as resources are allocated to less‑productive firms that survive only because of the floor. Fiscal burden on government if it must purchase surplus.