2.7.4 - Governments in markets - minimum prices

Question 1

State the definition of minimum price

Answer 1

A minimum price of price floor is a lower limit set by the government to stop the price of a good or service from falling below a certain level.

Question 2

Why are minimum prices used?

Answer 2

Minimum prices are used to protect producers in markets. This is often the case in agricultural markets where the government wants to protect the food supply.

Question 3

State the impacts of minimum price (for agriculture)

Answer 3

• Quantity demanded falls
• Quantity supplied increases
• Surplus is created due to more supply than demand
• Government needs to purchase surplus
• Surplus needs to be stored or destroyed
• Additional producers are attracted to the market by the minimum price which leads to more surplus and decreases supply in other markets.

Question 4

State what the yellow shaded area represents

Answer 4

Consumer surplus

Question 5

State the impact of minimum price on consumers

Answer 5

• Consumers lose surplus because they need to pay a higher price for the good
• Low income households suffer

Question 6

State what the green shaded area represents

Answer 6

Producer surplus

Question 7

State the impact of minimum price on producers

Answer 7

• Producer surplus increases due to having a guaranteed minimum price
• Higher revenue and profits

Question 8

State the impact of minimum price on the government

Answer 8

• Opportunity cost to the government as it costs money to buy excess supply and store/destroy it

Question 9

State the impact of minimum price on welfare

Answer 9

• Can lead to a misallocation of resources due to huge surpluses developing at the expense of reduced production in other markets
• Cost of waste when excess supply is destroyed when it cannot be sold
• Most of the benefits of minimum price go towards producers with losses to consumers and taxpayers

Question 10

Draw the diagram for minimum price

Answer 10