WAEC Economics 2012 Theory — Question 8

Model answer

(a) A minimum price is a price fixed by the government above the equilibrium market price, usually to protect producers (e.g. farmers) from receiving too low a price for their produce. On a demand-supply diagram, the minimum price is set above the equilibrium price, resulting in quantity supplied exceeding quantity demanded at that price — i.e. it creates a surplus (excess supply). (b) Measures to make a minimum price effective: (i) The government must be willing to buy up the resulting surplus produce. (ii) The government can restrict supply (e.g. through quotas) to keep the price up. (iii) Provision of storage facilities to keep the surplus produce before use. (iv) Government subsidies to producers to encourage compliance. (v) Enforcement/monitoring to prevent the produce from being sold below the fixed minimum price.