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Minimum Price

  • Date Submitted: 12/28/2013 10:04 AM
  • Flesch-Kincaid Score: 54.5 
  • Words: 1541
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Answer 1
Explain why the introduction of a minimum price above the equilibrium price reduces social welfare.

Definition of minimum price: ‘’A minimum price is a price floor below which the market price cannot fall. To be effective the minimum price has to be set above the equilibrium price.
The best example of a minimum price is a minimum wage in the labour market.‘’ (tutor2u.net)
Definition of equilibrium price: Is the price for which demand and supply are equal and there is no tendency for the price to change.
The definition of consumer surplus: Is the monetary gain obtained by consumers because they are able to purchase a product for a price that is less than the highest price that they would be willing to pay. It is the area under the demand curve and above the price.
Social welfare equals consumer and producer surplus.
When the minimum price is higher than the equilibrium price, the government can intervene in order to support producers and to ensure that the price is not below of the minimum price, so the government can set a higher price than the equilibrium price in order to help producers.
In theory when we face minimum price the government wants to support producers because the government can think or evaluate that the equilibrium price is very low and harms producers. For example in the labour market the government can think that the employee wages are unacceptably low and is unfair, so they can set a minimum wage in order to set establish the equilibrium.
Price
Price

Excess supply
  (surplus)
Excess supply
  (surplus)
D
D
Supply
Supply

           
Pg
Pg
Minimum price
Minimum price
                           
C
C
B
B
                     
                     
Pe
Pe
A
A
                 

K
K
                       
Demand
Demand
               
Pf
Pf...

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