Economics of Minimum Prices I A Level and IB Economics

In this updated revision video we explore the economics of minimum prices using three contexts that are often chosen by examiners - minimum wages, guaranteed support prices for farmers and minimum retail prices.

In economics, a minimum price, also known as a price floor, is a form of government intervention that sets a legal minimum price for a specific good or service. This means that the price of the good or service cannot legally be sold below the set minimum price. Minimum prices are typically imposed above the equilibrium price to prevent prices from falling too low and to achieve certain economic or social objectives.

Some reasons for governments to impose minimum prices include:

1. Protecting producers: A minimum price can ensure that producers receive a certain income level, particularly in sectors where production costs are high, or market fluctuations may lead to unstable incomes. Agricultural products, for example, often have minimum prices to protect farmers.
2. Encouraging production: By guaranteeing a higher price, a minimum price can provide an incentive for producers to increase production, which may be essential for food security or other strategic sectors.
3. Reducing consumption: In some cases, minimum prices may be used to discourage consumption of certain goods or services, such as alcohol, tobacco, or gasoline. Higher prices can lead to lower demand, helping to address negative externalities associated with their consumption.
4. Correcting market failures: Minimum prices can help address market failures, such as in the case of monopoly power, where a single firm can set prices significantly above the competitive level.

However, minimum prices can also have unintended consequences, such as:

1. Surplus production: By setting prices above the equilibrium level, minimum prices can lead to surplus production, as the quantity supplied exceeds the quantity demanded. This can result in wasted resources or increased storage costs.
2. Inefficient resource allocation: By encouraging overproduction in certain sectors, minimum prices can lead to a misallocation of resources, as factors of production are not being directed towards their most efficient use.
3. Higher prices for consumers: While minimum prices can benefit producers, they can lead to higher prices for consumers, which may disproportionately impact low-income households.

In summary, minimum prices as a form of government intervention can have various economic and social implications, and their effectiveness depends on the specific context and objectives of the policy.