(a) With the aid of a diagram, explain a minimum price. [5 marks] (b) State any five measures by which a minimum price for an agricultural produce can be ma...

(a) Minimum price

A minimum price, also called a price floor, is the lowest price fixed by government below which a commodity must not be bought or sold. For it to have an effect, it must be fixed above the equilibrium price.

In the diagram, the demand curve is DD and the supply curve is SS. They intersect at E, giving the equilibrium price P_e and equilibrium quantity Q_e. Government fixes the minimum price at P_min, which is above P_e. At this price, quantity demanded falls to Q_d, while quantity supplied rises to Q_s. The difference, Q_s − Q_d, is excess supply or surplus. Government must therefore take measures to dispose of, buy up, or prevent the production of the surplus if the minimum price is to be maintained.

(b) Measures for making a minimum price of an agricultural produce effective

1. Government purchase and buffer stock: Government may buy the excess output at the guaranteed minimum price and store it as buffer stock.
2. Promotion of exports: Export markets may be developed to increase demand for the produce and reduce the surplus.
3. Advertisement and publicity: Extensive advertising can increase consumers' awareness and demand for the agricultural produce.
4. Tax on substitutes: Taxes may be imposed on close substitutes, raising their prices and shifting demand towards the protected produce.
5. Restriction of output: Government may introduce quotas, acreage restrictions, or production licences to reduce supply.
6. Withdrawal or reduction of production subsidies: Reducing subsidies to producers raises production costs and discourages excessive output.
7. Higher taxes on producers: Appropriate taxes may discourage overproduction and reduce the quantity supplied.
8. Encouragement of alternative products: Resources may be diverted to the production of other commodities by granting incentives or reducing taxes on those commodities.