1.4.1 Minimum Prices Flashcards
what is a minimum price
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
give examples of minimum prices
NMW
minimum unit pricing e.g of alchohol
how is a minimum price shown on a diagram
draw equilibrium as usual, then add a horizontal line above equilibrium
what is the effect of minimum prices on producers
- 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
what is the effect of minimum prices on consumers
- due to the higher price consumers are unable/unwilling to buy as much as before
- demand contracts
what now arises from minimum prices
- 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
what may a minimum price lead to in the labour market
unemployment
what are the pros of minimum prices
- 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
what are the cons of minimum prices
- 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
what does the impact of minimum pricing depend on
- how far above equilibrium the min price is set
- PED and PES
- whether the government intervene to prevent a surplus
how does PED/PES affect the impact of minimum pricing
the greater the elasticity the greater the surplus that arises as demand and supply are more responsive
how may the government intervene to prevent a surplus
impose quotas on producers
what will the government have to do to maintain the minimum price
- intervene in the market to buy up the surplus
- this causes demand to shift outwards to form a new equilibrium