Theory question 109
Price Determination(a) With the aid of a diagram, explain a minimum price.
(b) State any five measures by which a minimum price for an agricultural produce can be made effective.
Show the model answer
(a) A minimum (floor) price is a price fixed by government above the equilibrium, below which the good may not be sold, usually to protect producers. Diagram: D and S curves crossing at Pe; a horizontal line at Pmin above Pe; quantity supplied exceeds quantity demanded, showing a surplus.
(b) Any five: government buys up the surplus (buffer stock); storage facilities for the surplus; export of the surplus; output quotas to restrict production; laws and penalties against selling below the price; subsidies for processing into other products; destroying or giving away surplus as aid; encouraging local consumption.
The surplus at the minimum price must be absorbed or controlled.