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Quantity controls

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Quantity controls

Picture the covid-19 lockdown is in full force; you visit the supermarket to buy supplies to fill up your kitchen shelves at home, except you can't because you're only allowed to buy one of each item. You just wanted some cheese that'll last you through the lockdown, and there are lots of it on the supermarket shelves. Meanwhile, you look at the toilet paper section, and it's all completely gone. So why are they giving your cheese quantity controls?

This means the supermarket has put a quota or quantity control on the items you want. While this scenario is a simplified version of quantity controls, the government uses quantity controls as a type of intervention to achieve specific outcomes. This is why we're here; to discuss quantity controls. Read on; it's fun!

Quantity Controls Definition

First things first - quantity control limits the quantity of a product that can be bought or sold. It's an upper limit, so basically, the government makes sure that producers do not sell past a set quantity of a specific good. Or, the government makes sure that consumers do not buy past a set quantity of a specific good. Economists may also refer to quantity control as a quota.

Quantity control is a government intervention limiting the quantity of a product that can be bought or sold.

Let's look at an example.

Let's consider a country where the government issues a special license for coffee producers. At any point in time, the government issues 500 licenses, meaning there cannot be more than 500 coffee producers in the country. Without a license, other firms cannot produce coffee in the country.

In the above example, the government has placed quantity control on coffee production. Therefore, even though other firms may want to produce coffee, all the firms have to compete for the 500 licenses being issued. What would happen to the price of these permits if more than 500 want to produce coffee? If you guessed, that there would be a price increase, you'd be right! The government may use quantity controls to help the producers of a particular good through the resulting price increase.

The Inefficiency of Quantity Controls

The government may introduce quantity controls for good or bad reasons. For instance, producers of coffee may be genuinely struggling, and introducing quantity control on coffee may help them by increasing the coffee price. However, a (corrupt) government could also introduce a quantity control on coffee just to help some friends make a large profit! Usually, quantity controls lead to inefficiency. How? Let's explain!

Look at the example below.

Let's consider a country where the quantity of coffee bags produced yearly is limited to 800,000.

First, we will look at the coffee bag market without quantity controls. This will help us see how the market should act under normal circumstances. The market for coffee bags without quantity controls is illustrated in Table 1 and Figure 1.

 Price per coffee bag ($) Quantity Demanded (hundred thousand) Quantity Supplied (hundred thousand) 6.5 7 15 6.0 8 14 5.5 9 13 5.0 10 12 4.5 11 11 4.0 12 10 3.5 13 9 3.0 14 8 2.5 15 7 Table 1. Demand Schedule for Coffee Bags If the price is too low or too high, there will be a mismatch resulting in a shortage or surplus, which reduces the overall efficiency of the market. At the equilibrium price ($4.5), the efficiency of the market is maximized.

Below is a graphical representation of the demand schedule in table 1.

Figure 1. Coffee bag market without quantity control, StudySmarter Originals

Table 1 and Figure 1 show that the market reaches equilibrium at a quantity of 1.1 million coffee bags. At this quantity, the price of a coffee bag is $4.5. This is the price at which consumers want to buy a coffee bag. Economists refer to this as the demand price. The demand price of a quantity of a good is the price at which consumers are willing to purchase that quantity of the good. The same goes for the supply side of things. Since the producers are willing to supply 1.1 million bags of coffee at a price of$4.5, this is the supply price.

The supply price of a quantity of a good is the price at which producers are willing to supply that quantity of the good.

Equilibrium is the best outcome for the market, until the government's quantity control of 800,000 bags of coffee kicks in. Let's look at Table 2 and Figure 2.

Since the demand price does not match the supply price in the example above, there is a market inefficiency as a result of the quota. There is a deadweight loss because the producers could have sold 50,000 more packs for $6 and made a lot more money. And the consumers could have bought a pack for$6, which is $3 cheaper. Congrats! You finished the article! You should read our article on Price Control if you're looking for another interesting read! Quantity Controls - Key takeaways • Quantity control is a government intervention limiting the quantity of a product that can be bought or sold. • The demand price of a quantity of a good is the price at which consumers are willing to purchase that quantity of the good. • The supply price of a quantity of a good is the price at which producers are willing to supply that quantity of the good. • A deadweight loss occurs when the demand price exceeds the supply price. • Governments introduce quantity controls by limiting production, exports, and imports or providing a limited number of licenses for producing a specific good. Frequently Asked Questions about Quantity controls A quantity control is a government intervention that limits the quantity of a product that can be bought or sold. A price control is an upper or lower limit placed on the price of a good by the government. A quantity control is a government intervention that limits the quantity of a product that can be bought or sold. Vessel quantity limits aimed at controlling overfishing. Quantity controls usually create market inefficiency. A quantity control is a government intervention that limits the quantity of a product that can be bought or sold. Final Quantity controls Quiz Question What is a quantity control? Show answer Answer A quantity control is a government intervention that limits the quantity of a product that can be bought or sold. Show question Question What is demand price? Show answer Answer The demand price of a quantity of a good is the price at which consumers are willing to purchase that quantity of the good. Show question Question What is supply price? Show answer Answer The supply price of a quantity of a good is the price at which producers are willing to supply that quantity of the good. Show question Question What is deadweight loss? Show answer Answer A deadweight loss occurs when the demand price exceeds the supply price. Show question Question Missed opportunities are what economists call deadweight loss. Show answer Answer True Show question Question Quantity controls usually lead to market efficiency. Show answer Answer False Show question Question The demand price is often equal to the supply price when quantity controls are introduced. Show answer Answer False Show question Question Ideally, economists want the supply price to be equal to the demand price. Show answer Answer True Show question Question A quantity control is usually a lower limit on quantity. Show answer Answer False Show question Question Quantity controls can be in the form of licensing. Show answer Answer True Show question Question Before quantity controls are introduced, the supply price equals the demand price at equilibrium. Show answer Answer True Show question Question Quantity controls can be introduced with the intention of helping the market. Show answer Answer True Show question Question A quantity control only makes sure that consumers cannot buy over the limit. However, producers can sell any quantity. Show answer Answer False Show question Question A limit on exports and imports is a method of quantity control. Show answer Answer True Show question Question A quota is not the same as a quantity control. Show answer Answer False Show question Question A risk of implementing quantity controls is... Show answer Answer Inefficiency Show question Question Without quantity controls, what happens if the price of goods supplied is too high? Show answer Answer There is a surplus. Show question Question Without quantity controls, what happens if the price of goods supplied is too low? Show answer Answer There is a shortage. Show question Question A ________ is ___________ that prevents goods from being sold at a lower price. Show answer Answer Price floor, lower limit Show question Question What is not an option that the government has for limiting the quantity of a good on the market? Show answer Answer Product standards. Show question Question Why do quotas result in market inefficiency? Show answer Answer They prevent demand and supply prices from matching to reach equilibrium. Show question Question What is a benefit of quantity control? Show answer Answer It can control the amount of a negative burden on society. If too many cars are creating congestion, then the government can limit the number of license plates that can be registered. Show question Question __________ is a negative effect of quantity controls. Show answer Answer Scarcity Show question Question How can price controls have a similar effect to quantity controls? Show answer Answer Producers may produce less of a good if they are not allowed to charge above a certain price. Show question Question If consumers are willing to buy 17 bags of flour at$3.50 per unit but it costs suppliers \$1.25 to produce each unit, the market is experiencing...

Market inefficiency.

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Question

Can a fishing license be a quota?

Yes, if the government limits how many licenses can be distributed.

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Question

What can governments do to help domestic producers?

They can set import quotas.

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Question

How might quantity controls affect prices?

Producers may increase the price if they realize there is high demand but limited supply.

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Question

Why is deadweight loss a missed opportunity?

Because producers would have had the opportunity to sell more of their products and the consumers would have had the opportunity to buy at a cheaper price.

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