minimum prices Flashcards
aka
price floor
what is a minimum price
price control enacted by teh gov usually set above equilibrium makret price
why do we use price floors
think price way too lwo we want to rise it
when you enact a minimum price legally you cannot
fall below it hence its a floor
explain the two reasons why we use minimum prices
protect producers from price volatility especially primary comm prodiucers e.g farmers
solve mkt failure by increasing price in mkt therfore discouraging consumption and production of that g/s that does harm to society
why in terms of price volatility is higher prices good
more rev cause demand is inelastic
this can increase profit margins
increase SOL
draw the graph
demand and s as normal
draw p min line above - put price floot label
draw line going down - qd and qs
draw contraction and extension lines
draw hte excess supply bit
axis price of wheat - y
quantity of wheat - x
what happens to price in mkt
what happens to QD
increases form p1 to p min
what happens to qd - contracts then falls from q1 to qd cuz price is higher
what happens to price in mkt
what happens to demand in mkt
increases form p1 to p min
what happens to qd - contracts then falls from q1 to qd cuz price is higher
what happens to supply in market
extension and increases
q1 to S
because producers respond to incentive of increasing price by producing more ouptut
what 2 phrase can we use to analyse excess uspply
inefficient allocation of resources
and massive burden on producers
why is the excess supply a massive burden on producers and inefficient allocation of scarce resources
producers put cost into selling output but only sell QD
this decreases profit margins
what are we gonna do with surplus = dsetroy it /store it whihc is a huge cost
as long as the gov can afford it what do they do in the case of excess uspply of min mkt
buy up excess supply - inervention buying
buy QD - qs at p min price
what s teh cost of intervention buyig
qdqsbc
producer rev depends on
Whether there is intervetion buying
if theres intervention buying what is the producer rev
p min
q
s
0
what case may we not see intervention buying
in developing coutnries
if there is no intervention buying what is the producer revenue
P min
b
qd
0
by intervening the gov may untintentioanlly create
dwl
why does gov create a Dwl
The loss in producer and consumer surplus due to an inefficient level of production
who are the key stkh who were looking to see impact of min price
consuemr
producer
gov
explain the impact on consumers
price got to pay , do thye not liek it and why
what is the effect on lower income hh
OT can consumers ugfer and why
i.e
- costs
- borrowing
- OC
overall net effect
but
they dont like paiyng highe prices : CS eroded , Q are lower and choice is lwoer
effect can be regresive as in low income hh have to pay highe rprices
OT ocnsumers suffer as they bear the cost of intervention buying through highe taxes /cuts tot other areas of gov spending in econ
gov could be borrowing and paying debt interest which is a huge opportunity cost i.e culd have been used elsewhere productivley in econ which would have given consumers more beenfit
overall net effect is -ve but can say fact industry survicves mean producers continue to produce and get the goods and services
the effect on rpducers depends on if
theres intervention buying
explain impact on producers w IB
get more rev , more PS ,
survive in mkt w price volatility if P falls and this is good for livelihoods and SOL
workers happy as theres less risk of unemp q
explain impact on gov
in theory
concerns
what does this do to the poort
unintensed consequences
costs
excess supply
what could they do but what does this cause
in theory yes if core goals reached and solving mkt failure
no cause concerned for impact on consumers
regressive
untinded consequence like lck mkt forming
welfare loss of higher orices
concerned about costs of IB fnding issues
+ bearing excess supply means got to store or destroy whihc is costly and waste of resources
could do duming overseas wgucg us nit fiid as create internaitonal relation issues
ultimatlyey what have the gov got to do when desciidng to interven
weigh up costs and benefits
