(a) With the aid of a diagram, explain a minimum price. [5 marks] (b) State

Explanation

(a) A minimum price is a price fixed by legislation above the equilibrium, below which it is illegal to buy or sell.

(b) Some measures by which a minimum price can be made effective are: (i) Increase in demand through the promotion of exports to establish an equilibrium at the minimum price. (ii) Increase in demand by the imposition of taxes on substitutes to raise their prices. (iii) Increase in demand through increased advertisement. (iv) Increase in demand through the institution of a buffer stock scheme. (v) Decrease supply by raising prices of inputs. (vi) Reduce or withdraw subsidies in production to decrease supply. (vii) Impose higher taxes on producers to discourage production. (viii) Reduce taxes on the production of other commodities to attract resources into them.