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Consequences of Introducing a Minimum Price in the Market


With the aid of a diagram, explain the consequences for consumers and producers of introducing a minimum price in the market for a product. [8]



CIE AS level November 2021

Preview Answer

(Step 1: Define 'minimum price' in the introduction)

A minimum price is a price floor set by the government or some other agency. The price is not allowed to fall below this level. Controls are only valid in markets where the minimum price is set above the normal equilibrium price.

A minimum price impacts both consumers and producers. This can be explained using the following diagram:

[Diagram available in the full essay!)

(Step 2: Explain the effect of minimum price on consumers)

➡️Introducing an effective minimum price in the market for a product has several consequences on consumers.

1️⃣ Consumers will need to pay a higher price compared to the price that would have been charged where demand and supply in a market were in equilibrium.

In diagram 1, the equilibrium price is initially Pe. If the government introduces a minimum price above the equilibrium price, the new price paid by consumers will be P1.

2️⃣A minimum price will discourage the consumption of the product by consumers

In diagram 1, if the government introduces a minimum price above the equilibrium price at P1 then the quantity demanded will fall from Qe to Q1 because consumers are prepared to buy less at a higher price.

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