A Level Economics AQA Practice Exam

What do price controls refer to?

1. Limits on the quantity of goods available in the market

2. Price adjustments based on supply and demand

3. Government-imposed limits on prices that producers may charge

4. The private sector's voluntary price changes

The correct answer is: Government-imposed limits on prices that producers may charge

Price controls refer specifically to government-imposed limits on the prices that producers may charge for goods and services. These regulations are designed to manage the affordability of essential goods for consumers, often to prevent prices from becoming excessively high (price ceilings) or to ensure that producers receive a minimum amount for their goods (price floors). For instance, rent controls are a common example of a price ceiling intended to keep housing affordable for lower-income residents. The implementation of price controls can significantly disrupt the normal functioning of the market by creating imbalances between supply and demand. When prices are artificially kept lower than the market equilibrium, it can lead to shortages, as producers might not find it profitable to supply enough goods at the lower price. Conversely, if a price floor is set, it may result in surplus, as consumers may be unwilling to buy the goods at higher prices. The other options describe different economic phenomena. Limits on the quantity of goods, while affecting availability, do not specifically define price controls. Price adjustments based on supply and demand reflect how markets naturally operate without intervention, and changes made by the private sector tend to be voluntary and based on market conditions rather than imposed regulations.