Chapter 5

The market system 3

price instability and
government
intervention

w w w . s t ud y i n t e r a c t i v e . o r g

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CHAPTER CONTENTS
LEARNING OUTCOMES -------------------------------------------------- 55
PRICE INSTABILITY IN PRIMARY MARKETS -------------------------- 56
WEATHER AND AGRICULTURAL OUTPUT ------------------------------ 57
PRICE STABILISATION POLICIES-------------------------------------- 58
MAXIMUM AND MINIMUM PRICING IN GOODS MARKETS----------- 59
MINIMUM WAGE POLICIES --------------------------------------------- 61

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LEARNING OUTCOMES
(a) Identify causes of instability of prices in markets for primary goods.

(b) Explain the impact of instability of prices on incomes of producers and the
stability of the industry.

(c) Explain the effects on prices, producer revenues and market equilibrium of
government policies to influence prices in markets.

(d) Illustrate the impacts of price regulation in goods and factor markets.

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PRICE INSTABILITY IN PRIMARY MARKETS

Primary goods include:
a) Basic foodstuffs
b) Primary raw materials
c) Minerals and metals

Cyclical variations in the price and supply of primary goods are caused by a
combination of unforeseen shocks e.g. extreme weather, and the lag-time needed
to adjust supply accordingly.

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WEATHER AND AGRICULTURAL OUTPUT

Farmers benefit from po
. Climate change has led to increasingly varied
harvests, consequently farmer s incomes are prone to vary considerably in the
absence of government intervention.

The key contributing factors, other than the impact of climate include:
(i)

Food being a necessity.

(ii)

Demand for food being inelastic.

The impact on total revenue is such that:

(i)

Poor harvest

leads to increased revenue.

(ii)

Good harvest

leads to reduced revenue.

Poor Harvest:
$
S0

P0

D0

Qty
Good Harvest:
S0

P0

D0

Qty

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PRICE STABILISATION POLICIES

Governments often intervene within agricultural markets, with variable results.

1. Buffer stocks

2. Direct payment schemes

3. Subsidies and set-aside

Consequences:

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MAXIMUM AND MINIMUM PRICING IN GOODS MARKETS

Governments may attempt to control prices through the use of maximum prices
(price ceiling) and minimum prices (price floors).

EXERCISE 1
Consider the following scenario whereby the government introduce a price ceiling in
the market for widgets.

$
S0

P0
Max
Price
D0

Q0

1a.

What will be the impact of the above?

Excess of demand over supply

Excess of supply over demand

An increase in the price

Nothing

Qty

1b. Consider the impact of setting a maximum price above equilibrium?

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EXERCISE 2
Consider the following scenario whereby the government introduce a price floor in
the market for strawberries.

$
S0
Min
Price
P0

D0

Q0

2a.

What will be the impact of the above?

Excess of demand over supply

Excess of supply over demand

An increase in the price

Nothing

Qty

2b. Consider the impact of setting a minimum price below equilibrium?

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MINIMUM WAGE POLICIES

The purpose of minimum wages are to ensure:

(a) Low paid workers have an acceptable standard of living.

(b) Skills shortages are addressed in certain industry sectors.

The impact of minimum wage restrictions:

Wage
rate

SL
Min
Wage

W0

DL

Qty of labour rate

The resulting effects include

o

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