minimum price

Question 1

describe minimum price graph

Answer 1

1. The effect of imposing the minimum price Can force market price to rise P1-Pmin
2. This creates a new supply curve S2Pmin
3. Minimum price causes disequilibrium in the free market price mechanism creating excess supply.
4. Quantity demanded, falls from Q1 to Q2
5. Contraction in demand.
6. If minimum price is placed on a demerit good, there may be a more socially optimal level of consumption and market failure may be corrected
7. Aims to solve the problem of over consumption and all the production of demerit goods.

Question 2

May depend on PED. Paragraph

Answer 2

1. The impact of minimum price depends on PED
2. If demand for demerit goods is price inelastic
3. Increase in price will reduce quantity demanded by less than proportionately
4. 10% increase in price leads to 5% fall in QD for a PED OF -0.5
5. Market failure may not be corrected for demerit goods.
6. Due to small fall in quantity demanded, meaning that cost a third parties may not be reduced significantly.

Question 3

real resource opportunity cost, price inelastic product

Answer 3

1. if the government has to guarantee Pmin for and pay for the excess supply of product consumers with price inelastic demand, my face of fall in consumer surplus
2. there is a real resource opportunity cost to continued overproduction.
3. as factors of production could be deployed elsewhere, for example, alternative products, are not subject to the buffer stock system.
4. In addition supplies could be tempted to break the law and supply at a price below minimum price
5. If these problems present, a high policing cost this could result in government failure
6. Government intervention to correct market failure leads to further miss allocation of resources.

Question 4

black markets

Answer 4

• a minimum price for a demerit good which is significantly above the average cost of production could create a black market with an increase in the number of people bringing cheaper demerit goods back from abroad and then selling this on not only might the externalities continue but the government would lose out on tax revenue