1.4.1 Minimum Prices

Question 1

what is a minimum price

Answer 1

legally imposed price floors that a producer cannot go below. usually associated with minimum hourly wage rates in the labour market or guaranteed price support schemes

Question 2

give examples of minimum prices

Answer 2

NMW
minimum unit pricing e.g of alchohol

Question 3

how is a minimum price shown on a diagram

Answer 3

draw equilibrium as usual, then add a horizontal line above equilibrium

Question 4

what is the effect of minimum prices on producers

Answer 4

• due to the rise in price, producers are incentivised to supply more of the good to higher profits now derived from the good.
• This expands supply

Question 5

what is the effect of minimum prices on consumers

Answer 5

• due to the higher price consumers are unable/unwilling to buy as much as before
• demand contracts

Question 6

what now arises from minimum prices

Answer 6

• excess supply now exists in the market by the distance QS to QD
• there is now a surplus of the good
• disequilibrium has arisen as demand is no longer equal to supply

Question 7

what may a minimum price lead to in the labour market

Answer 7

unemployment

Question 8

what are the pros of minimum prices

Answer 8

• can reduce consumption of harmful goods with high external costs
• raises awareness of the issue that could discourage consumption
• can reduce exploitation of big business power

Question 9

what are the cons of minimum prices

Answer 9

• excess supply arises and this is evidence of an inefficient allocation of resources
• low income groups will be hit by higher prices
• drop in consumer surplus
• government resources will need to be used to enforce minimum pricing

Question 10

what does the impact of minimum pricing depend on

Answer 10

• how far above equilibrium the min price is set
• PED and PES
• whether the government intervene to prevent a surplus

Question 11

how does PED/PES affect the impact of minimum pricing

Answer 11

the greater the elasticity the greater the surplus that arises as demand and supply are more responsive

Question 12

how may the government intervene to prevent a surplus

Answer 12

impose quotas on producers

Question 13

what will the government have to do to maintain the minimum price

Answer 13

• intervene in the market to buy up the surplus
• this causes demand to shift outwards to form a new equilibrium