Minimum Prices (Price Floors) – Economics Revision – The Tutor Academy
Minimum Prices (Price Floors) – Economics Revision – The Tutor Academy
Level: AS Levels, A Level, GCSE – Exam Boards: Edexcel, AQA, OCR, WJEC, IB, Eduqas – Economics Revision Notes
Minimum Prices
Minimum Prices are legally enforced by the government to protect producers – they know in advance that they will receive a guaranteed amount of income.
Examples of Minimum Prices include:
- National Minimum Wage
- Minimum Price on commodities
The Equilibrium Price is Pe. If the government were to set a Minimum Price above the Equilibrium Price, there will be a surplus of MN Kilos.
Advantages of a Minimum Price
- Stable Income for Producers – minimum prices allow farmers and other producers to earn a guaranteed amount of income for their products
- Protects Workers – minumum wages such as a National Minimum Wage protects workers and ensures firms do not exploit their labour as they are required to pay their employees a guaranteed wage
Disadvantages of a Minimum Price
- Overproduction of Goods / Services – minimum prices increase the price of commodities so producers will supply more. This creates a surplus in which the government has to buy and store for later times if a shortage occurs
- Misallocation of Resources – overproduction and surpluses of goods / services suggests an inefficient allocation of resources leading to wastages and higher costs
- Storage Costs – the cost of storage incurred when dealing with surpluses and overproduction is paid by taxpayers
- Disequilibrium in the Market – there will be an excess supply in the market as supply will outweigh demand
Example
CAP (Common Agricultural Policy)
The CAP is an EU agricultural subsidy; it works by guaranteeing a minimum price to producers and by direct payment of a subsidy for crops planted. This gives farmers economic certainty and also a certain quantity of agricultural goods.
Aims of the cap
- Increase productivity
- Increase farmers income
- Stabilise markets
- Assure availability of supplies
- Ensure reasonable prices for consumers
Why subsidise agriculture?
- Declining income of farmers. As income in the economy rises the proportion spent on agriculture decreases as the YED is low and so farmers lose out during periods of economic growth.
- Positive externalities of farming.
- Fluctuating prices as the PED and PES for agricultural commodities are low therefore they fluctuate a lot.
Quick Fire Questions
1. Define a ‘Minimum Price’ (2 marks)
2. Identify two common examples of a Minimum Price (2 marks)
3. Using a diagram, explain the effect on price and quantity by implementing a Minimum Price (4 marks)
4. Identify and explain two advantages of a Minimum Price (4 marks)
5. Identify and explain four disadvantages of a Minimum Price (8 marks)
Next Revision Topics
- Maximum Prices
- Direct & Indirect Taxes
- Government Failure
- Subsidy
- Externalities
- Merit & Demerit Goods
- Public & Private Goods
- Consumer & Producer Surplus
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