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Economics A Level
Micro - Paper 1
Minimum Price (Price Floor)
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Created by
Toby Landes (GRK7)
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Cards (12)
Minimum price
A fixed price or a price floor enacted by the government usually set above the
equilibrium
market price
The
government
is saying the
equilibrium
price in the market is too low, so they want to raise it by implementing a minimum price
Price floor
The
lowest
price that can
legally
exist in the market
Reasons for
governments
to use
minimum
prices
To protect producers from price volatility, especially
farmers
and
producers
of primary commodities
To solve market failures by
raising price
, discouraging consumption and production of goods/services that do
harm
to society
Impact of minimum price
1. Price
increases
2. Demand
contracts
3. Supply
expands
4. Excess supply (
surplus
) created
Excess supply created
Burden
on producers as they have high costs but can only sell the
lower
quantity demanded
Government
intervention to address excess supply
Intervention buying
- government buys up the
excess
supply
Cost of intervention buying
Price of
minimum
price multiplied by the quantity of
excess supply
With
intervention
buying
Producer
revenue increases
as they sell the full quantity supplied at the
minimum
price
Without
intervention
buying
Producer
revenue
only
increases
for the quantity demanded at the minimum price
Minimum price creates a
deadweight welfare loss
Impact on stakeholders
Consumers - pay
higher
prices, consumer surplus
eroded
, regressive impact on low-income households
Producers - benefit if there is
intervention
buying, protected from
price volatility
Government - concerned about cost of
intervention
buying, unintended consequences like
black markets