Price floor

Question 1

Define price floor

Answer 1

• legally established min price
• firms permitted to sell at or above
• effective only when set above eqm price

Question 2

Objectives of price floor

Answer 2

1. Ensure min wage for workers
   - prevent exploitation by employers
2. Support prices of gds
   - raise incomes for producers

Question 3

Effects of price floor

Answer 3

• price rises
• qq exchanged falls as qdd falls
• surplus occurs
• if gov does not buy surplus, effect on TR/incomes of producers depend on price elasticity of demand
• Di: smaller proportionate fall in qdd
• size of surplus depend on PED&PES of gd
• more price elastic, larger surplus
• surplus is permanent as price not allow to fall to eqm lvl

Question 4

What price floor leads to

Answer 4

• greater supply of gd generated by free market
• misallocation or overallocation
• represent inefficient use of resources

Question 5

What happens to surplus

Answer 5

1. Bought by gov
2. Dumped
3. Diverted to other mkts
4. Destroyed

Question 6

Bought by govt

Answer 6

• may be bought by gov
• stores them up
• feasible only if product is non-perishable

Question 7

Dumped

Answer 7

• may be dumped in another countries

- selling gd at price that is below wht is charged in local mkt

Question 8

Diverted into other markets

Answer 8

• e.g. milk surplus diverted into cheese production

Question 9

Destroyed

Answer 9

• may be just destroyed

Question 10

Minimum wage law

Answer 10

• practised in some countries e.g. Indonesia
• eg of gov intervention in labour mkt
• increase wage rate of some workers (otherwise in free mkt)
• imposed to prevent exploitation of workers, ensure reasonable S/L for workers

Question 11

Effects of minimum wage law

Answer 11

• wage increase
• unemployment occurs, surplus of workers (diff btwn qss and qdd of labour)
• no. of ppl willing to workers < no. of ppl firms willing to hire
• extent of unNt dependent on PED and PES

Question 12

Demand for labour price elastic/inelastic

Answer 12

• firms easily substitute capital for labour

- esp unskilled labour, more workers retrenched, unNt worse

Question 13

other effects of min wage law

Answer 13

• increase in prices of final gds and svs
• inflation (sustained increase in prices in an economy)
• may occur if firms pass a higher COP to consumers
• cuz of increase in labour cost