Max and Min prices

• Effect of minimum prices?

  At higher prices quantity demanded falls and quantity supplied rises which creates excess supply and a disequilibrium. Used for demerit goods such as alcohol
• Reasons for minimum price of alcohol?

  Reduction in binge drinking

  Improved health of individuals

  Reduced social costs

  Targets key groups that buy lots of cheap alcohol
• Reasons against minimum prices on alcohol?

  Unfair on sensible drunks- regressive as the poor will have to pay a larger proportion of income

  Depends in whether demand is inelastic

  Alcohol may already be sold above the minimum price

  Result in 'black market' activity

  Lead to lower tax revenue and GDP

  Possibly inflationary
• Effect of maximum proves?

  at lower prices, quantity demanded rises and quantity supplied falls resulting in excess demand and a disequilibrium, used on essential products such as energy
• case for maximum price of energy?

  Essential for everyday living so reduces relative poverty, monopoly eploitation is reduced (improves allocative efficiency,) inelastic supply due to regulations
• case against maximum prices for fuel?

  Shortage/ excess demand, encourages black market activity, queues, market becomes less profitable so will invest less
• Volatile prices?


  Experience frequenct and large fluculations in prices eg primary product markets

  Likekly that entrepreneurs may avoid entering such markets because changes in price could reduce profits significantly so insufficnet resources may be allocated to the production of such goods
• Reasons for price volatility?

  Primary products with inelastic PED and PES- few subsitutes

  Primary product makrers are prone to demand and supply shocks- shocks are suddent and large scale shifts
• Supply shocks?


  common inagriculture due to droughts and floods etc, which can reduce supply significantly. Supply may increase due to good weather and rain.

  As demand is inelastic the price varies signficantly. If more elastic, the price fluculation would not be as large
• Demand shocks?


  common in mining as minerals are used in capital equipment so may reduce demand during a recession or increase during a boom. As supply is inelastic, the price may vary from year to year. If supply was more elastic, the fluculation would not be as large
• Guaranteed minimum prices?


  a price below which firms cannot charge and the government guarantees to buy up all the excess supply.

  the government buys this stick and sells it during periods of low supply
• Buffer stock schemes?


  Seek to stablise the market price of agricultural products by buying supplies of the product when harvests are plentiful and selling the stocks when supplies are low.

  Require a buffer stock manager who buys and sells to manipulate supply and demand to stablise the price within a price band- must be preagreed, usually by analysing the average price
• Benefits of buffer stock schemes?

  Price stability- more certainty for firms who will not receive too low revenue so can continue investment

  Price stability- more certainty for consumers who are guaranteed necessities for reasonabl prices

  Should be profit making as they buy when price are low and sell when prices are high
• Limitations of buffer stock schemes?

  Cannot store perishable items, band may not be set correctly, technological change affect supply, requires a latge market share, requires start up capital
• Min and max price of buffer schemes?

  Min price- ensure LEDCs a basic level of income so if supply rises, the scheme will buy an amaount to increase demand

  Max price- ensure consumers receive fair prices by selling stock if supply falls